17 March 2021

Your Discretionary Trust – Does it Form Part of Your Estate When You Die?

Tran Vuong
Tran Vuong

Did you know that your discretionary trust sits outside of your Will and do not form part of your estate when you die? What are the implications of this, and how do I manage them? 

Let’s start from the beginning.  Various structures are used to serve different purposes throughout one’s lifetime.  A common structure often used is a discretionary trust, or otherwise known as an ‘inter vivos trust’ – meaning that it is in existence throughout your lifetime.

What is a Discretionary Trust?

Unlike an individual or a company, a discretionary trust does not have a separate legal identity.  A discretionary trust is a fiduciary arrangement between one party (the trustee) to hold assets on behalf of a class of beneficiaries.  Because of this, assets that are being held in a trust are not yours, and therefore, these sit outside of your Will.

There are three certainties to a discretionary trust – the trustee, trust property and beneficiaries.  The trust deed establishes and sets out the terms and conditions for the governance of the trust.  Various roles within the trust play a critical part in estate planning.  Therefore, it is important to understand what happens to these roles when you die, especially if you control them during your lifetime.

The Three Certainties of a Discretionary Trust

There are three certainties of a discretionary trust – certainty of intention, certainty of object and certainty of subject matter.  The following discusses the typical roles within a discretionary trust.

The trustee: the person(s) or company responsible for the daily management of the trust and its assets. Broad powers are given to the trustee to enable it to conduct the trust and manage its assets.

If you are the individual trustee or a director and shareholder of the corporate trustee, consideration must be given to who you pass this control to (if individual trustee) or who inherits the shares (if corporate trustee) when you die.  The method in which this is done will be contained in the trust deed.  Generally, under modern trust deeds, there will be provision for the trustee to nominate a successor during their lifetime (whether by way of deed or via their Will), and in the absence of such nomination, the role may pass to the trustee’s Legal Personal Representative (e.g. executor).  There may also be trigger events that will disqualify someone from being a trustee, which may be beneficial if there are asset protection concerns.

The appointor/principal: the person(s) that have the ultimate control of the trust and has the ability to hire and fire the trustee.  Under some trust deeds, the appointor might also have the power to consent to, or vary the terms of the trust deed, approve distributions of capital and consent to an earlier vesting date of the trust.

It is not uncommon for the appointor and trustee to be the same person, but note that these roles differ from one another.  Again, the terms of the trust deed will dictate the method in which a successor can or cannot be appointed.  The appointor need not be a family member and can be an independent third party.  Either way, the succession must always be structured appropriately to achieve the testator’s objectives.

Beneficiaries: the class of person(s) and entities that may benefit from the income and capital of the trust.  Typically, beneficiaries are often limited to “bloodline” family members or entities within a family group.  Beneficiaries may be limited to only receiving income distributions as determined by the trustee, or they can receive both income and capital distributions (which may be subject to meeting certain criteria).

From the time of establishment, the classes of beneficiaries are generally quite wide to capture future generations, but as always, a review of the deed is required to confirm this.  It is also a matter of determining who will receive the capital when the trust is vested and whether that meets the estate planning objectives.

Of course, all of the above is subject to review of the trust deed.

Commonly Overlooked Factors

Factors commonly overlooked include unpaid present entitlements (UPEs) or loans.  These exist throughout the life of the trust and can come by way of a beneficiary loaning funds into the trust or where income has been allocated to a beneficiary but has not been paid out.  As these UPEs/loans are owed by the trust to you personally, these will form part of your estate – which means that your Legal Personal Representative can call for these to be paid into your estate.  If there are insufficient funds, trust assets may need to be sold to satisfy the cash flow.  On the contrary, if you are indebted to the trust personally, this will be a liability for your estate.  It is, therefore, vital that these issues are addressed when structuring your estate plan.

Why Structuring a Discretionary Trust Correctly is so Important

If structured correctly, a discretionary trust has many benefits both during and after your lifetime, including:

Asset protection: owning assets in a trust can be effective against spendthrift beneficiaries and creditors if a beneficiary becomes bankrupt.  It is also a useful tool to ensure that assets are protected and can pass onto future generations.

Ability to control your wealth: as the trustee has the discretion to make income and capital distributions to beneficiaries, it allows for taxation flexibility.

Probate savings: assets in a trust bypass the Probate process and will remain private.

It has been said before and will be repeated – review the trust deed and financials for the trust!  Proper structuring means that assets will either stay where they are supposed to stay or go wherever they are supposed to go after you die.

If you’d like to discuss this article in more detail, please contact Tran Vuong today.

Individual liability limited by a scheme approved under professional standards legislation (personal injury work exempted).

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