Which Structure Is Best for You? – Discretionary Trusts

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What trust options are available for succession planning?

Succession planning encompasses various trust options, including family trusts and discretionary trusts. In this discussion, we’ll explore family trusts, one of the two primary trust types (the other being unit trusts, which we’ll cover in a future issue).

A family trust is a trust where the beneficiaries do not have any fixed right to the income or capital of the trust. The income and capital are dealt with by the trustee at his/her discretion. The trustee of the trust can be a corporate entity, in which case the directors and shareholders of the company make the decisions on income and capital distribution. The trustee can also have the same powers as above but should not be a trust beneficiary.

In most trusts, the deed, which governs the running of the trust in the same way a constitution does for a company, will mention the role of an Appointor (sometimes called a Parent). While this Appointor does not own any of the assets held within the trust, he/she can exercise some control over the running of the trust by their ability to hire or fire the trustee. The Appointor, in this case, has ultimate control over the trust and can be a beneficiary.

Advantages of Family Trusts in Succession Planning:

  • FT can access the 50% CGT general discount where the asset has been held for over 12 months. This can also be passed on to beneficiaries who receive this gain.
  • Most CGT small business concessions can be flowed through to the beneficiary if the trust deed is drawn up correctly.
  • They are flexible in relation to how you can distribute the income and capital. You can successfully split income amongst several beneficiaries using each of their marginal tax brackets.
  • Limited liability is available if a corporate trustee is used.
  • It is easy to return capital as there is no equity as such.
  • Streaming different income types to different beneficiaries is available if the deed is draughted correctly.
  • You can admit new beneficiaries without losing control (although resettlement of the trust needs to be avoided for CGT purposes).
  • Have significant estate planning advantages, as the death of a beneficiary does not affect the ownership of the business.
  • Allow income distribution to beneficiaries that may have losses available to offset them.
  • It can be used equally as well for active or passive income.

Disadvantages of Family Trusts in Succession Planning:

  • It is sometimes harder to borrow in an FT as many banks have difficulty with the structure and will want legal advice on whether the trust deed gives the power to borrow.
  • Losses are trapped in the trust.
  • The small business 15-year CGT exemption may be challenging to access to satisfy the controlling individual test. To qualify, an individual must receive ≥ 20% of the income entitlement every 15 years.
  • Property held in an FT does not get the tax-free threshold for land tax.
  • Does not allow you to readily admit new partners into the business (there are no fixed entitlements). You may get around this problem with a partnership of FTs.
  • There may be restrictions on who you can distribute to if you need to make a family trust election. This election is required if the trust is trying to claim losses from prior years or imputation credits on franked dividends received.


Family trusts are very popular structures that allow flexibility in income and capital distribution, access to most CGT small business concessions, the general CGT discount, limited liability and estate planning advantages. The main disadvantage is the problem catering to succession planning and who will control this trust after the death of the original parent/appointor. This can be done by giving the problem proper legal attention, but it is often overlooked.

If you have any queries in relation to the above, don’t hesitate to reach out and contact us.

*Correct as of July 2014

*Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.

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