What is a family trust?

When someone says family trust, they are probably referring to a discretionary trust. The main reason why the word family usually replaces discretionary (besides being a shorter word) is probably because the trust is intended to benefit themselves and their own family members. There really is such a thing as a Family Trust though so I might come back to this in a later post.

So what is a trust?
Essentially it is a relationship where a trustee holds onto assets on behalf of one or more beneficiaries.

What is a trustee?
A trustee is whoever has control over the trust assets and is required to make decisions and attend to the day to day running of the trust. Think of the trustee as the manager of the assets, but technically not the owner. A company can act as a trustee so the decisions then rest on the director(s) of the company.

What is a beneficiary?
A beneficiary is the real owner of the trust even though they don't necessarily make any decisions and some beneficiaries don't even know that the trust exists. Beneficiaries are entitled to the assets of the trust and any profits generated from those assets. Most trust deeds allow other trusts and companies to be beneficiaries as well.

What is a trust deed?
A trust deed is the legal document that outlines the terms and conditions of the trust such as how it is to be setup and then how it is to be run. The trust deed will also specify who the appointor is.

What is an appointor?
The appointor has the important power to be able remove or replace trustees. This is usually the limit of their influence as appointors are not involved in the day to day running of the trust. However the appointor can also be the trustee if they so choose.

What is so discretionary about a discretionary trust?
Under current Australian taxation law, if a trust makes a net profit then it normally should distribute this profit to its beneficiaries every financial year. This is when the trustee can exercise their discretion to decide which beneficiaries will receive how much of the profits every year. Some years a beneficiary will receive more than last time, or less, or none at all. Sometimes the trustee can decide to not pay out any profits at all if they so decide.

Now you all know the bare basics of a discretionary trust. And I'll know that you don't read my blog if you keep referring to a family trust instead of a discretionary trust! Next time I will go through some advantages and disadvantages of using one to run your