Strategy 4 – A discretionary trust

This strategy takes one of the previous investment strategies and places it into another structure which you may not be familiar with—a trust.

Trusts are not uncommon and there are many types. There are two types of trusts, however, which are used more often than others. They are:
• discretionary trusts
• unit trusts.

However, for the context of this book, I will focus on one main type of trust and avoid going into too great a detail—discretionary trusts. There are many books that cover trusts and I suggest you get as much background information as possible before you take on this strategy.

So, who is involved in a trust and what are their roles?

There are a number of parties or people involved in a trust. They are:

Appointor The boss, the person with the most control. The appointor has the power to change the trustee and appoint a new one at any time
Trustee The person/s or company that controls the trust
Trust The structure that holds the investment assets
Beneficiaries Owners of the assets and entitled to the income of the trust

Financial Adviser Provides advice and manages the affairs
Solicitor Establishes the trust
Accountant To liaise with the adviser and prepare the regulatory requirements for the ATO

One point to always keep in the back of your mind with a trust; you (as the trustee) are the legal owner of the trust property although you are not the beneficial owner of the assets. The trustee has the responsibility to manage the trust assets and must act in the best interest of the beneficiaries.

Note: I may have already started to confuse you at this point. This area requires sound legal and accounting advice to ensure you have the right trust tailored for your situation. Don’t always assume the ‘off the shelf trust’ is right for you. You are far better to pay more for a tailored structured trust than a run-of-the-mill document.

A discretionary trust is called just that because the trustees (typically the parents in this context) can determine how much income may be paid to the beneficiaries of the trust. It is their discretion. The trustees can vary this amount from year to year.

A discretionary trust can achieve a number of objectives:
• It will take care of your family for the long term
• It has sound asset protection. That is your assets may be protected from creditors.
• A trust can be very flexible. It can assist in sharing the tax burden among your family and/or other members of the trust.
• It can trade in its own way but it is different from your personal tax structure and/or a company tax structure.