What is a trust?
Simply put, it is an obligation owed by a person or entity in relation to property that person or entity owes to others described in the trust deed as beneficiaries. A trust is not a legal person, like a company. Trusts can take many forms. They are usually differentiated by reason of the nature of the interest that the beneficiaries have in the trust assets.
What is it?
With discretionary trusts, the decisions as to who or what entity will receive allocations of income derived by the trust is determined by the discretion of the trustee. They are deliberately drafted that way so that no beneficiary has any property interest in the trust assets which can be attacked. Generally, our discretionary trust products are drafted with a specific risk profile in mind.
Different Categories of Discretionary Trusts
Discretionary trusts fall into 4 broad categories depending on the risk profile and the following template represents the least risk.
If the trust is used to house capital appreciating assets and if a beneficiary under the trust were to be declared bankrupt, it is very difficult, on case law, for that beneficiary’s trustee in bankruptcy to ever be able to attack the assets owned by the trust. Consequently, a number of drafting mechanisms are designed to achieve a scenario where no particular beneficiary has any “proprietary” interest in the trust assets. This is achieved by giving the trustee the power to accumulate income, a power to accumulate capital until the vesting of the trust, and wide, open classes of beneficiaries which can include children not yet born and entitles, such as companies, not yet formed (but formed in the future) – the class of beneficiaries is never “closed” and final.
Discretionary Trust Deed with the Foreign Beneficiary Exclusions
Most Australian States and Territories have introduced legislation which impose land tax surcharges and stamp duty surcharges on discretionary trusts which own residential real estate in circumstances where foreign persons, entities such as companies or trusts are able to benefit under the trust deed.
These surcharges are significant – in New South Wales, for example, a stamp duty surcharge of 8% - in addition to the normal stamp duty – is imposed on the value of the real estate being purchased. In some States these surcharges extend beyond real estate and can affect farmland.
Foreign beneficiary exclusion provisions are designed to prevent the application of foreign person land tax and stamp duty surcharges across all Australian states. If you have a discretionary trust and if there is any intention to purchase residential real estate in the trust, then the trust will require clauses that are irrevocable and incapable of amendment, prohibiting foreign persons and entities from being able to benefit under the trust. If it is not intended that the trust purchase real estate, then the template with the foreign beneficiary exclusions in place should NOT be used.