Discretionary Trust Vs Family Trust: Key Differences In Australia

If you’re thinking about using a trust for your small business, you’ve probably come across two terms again and again: “discretionary trust” and “family trust”. They sound similar, and many accountants use them interchangeably - which can be confusing when you’re trying to make the right call for your business.

The short answer is that a “family trust” in Australia is usually a type of discretionary trust used by a family group, often with a family trust election for tax purposes. But there are practical differences in how they’re set up and run, and those details matter for asset protection, tax flexibility, and day‑to‑day control.

In this guide, we’ll break down how trusts work in plain English, what “family trust” means in practice, how a discretionary trust differs, and when each option may suit a small business. We’ll also cover setup steps, key roles, and the core legal documents you’ll need so you can move forward with confidence.

What Is A Discretionary Trust?

A discretionary trust is a legal arrangement where a trustee holds and manages property or business assets for beneficiaries. The trustee has discretion (within the rules of the trust deed) about if, when, and how much income or capital to distribute to each beneficiary.

From a small business perspective, the key attraction is flexibility. If your revenue or family circumstances change, the trustee can adapt distributions year by year. Discretionary trusts are widely used in trusts in Australia for asset protection and tax planning (with advice from your accountant), but they must be set up correctly to work as intended.

It’s important to remember a trust is not a separate legal entity like a company. The trustee signs contracts and incurs obligations on behalf of the trust. That’s why many businesses choose a corporate trustee (a proprietary limited company) to provide an extra layer of protection.

What Is A Family Trust (And Is It Just A Discretionary Trust)?

In everyday Australian usage, a “family trust” is simply a discretionary trust that’s designed to benefit members of a particular family group. The trust deed usually defines who’s in the family group, and the trustee can distribute to those people at their discretion.

Many accountants also use the term “family trust” to refer to a discretionary trust that has made a “family trust election” with the ATO. That election can have tax consequences (for example, around franking credits and loss tracing). Whether you should make that election is a tax question - it’s one to run past your accountant.

So, is a family trust a discretionary trust? In practice, yes. Most family trusts are discretionary by design. The “family” part refers to who benefits and how the deed and tax settings are configured, not a different legal type of trust entirely.

Discretionary Trust Vs Family Trust: The Key Differences For Small Businesses

While the underlying mechanics are the same, there are practical distinctions to think about.

1) Beneficiary Scope

• Discretionary trust: Can be drafted with a broad class of beneficiaries, including individuals, companies and charities (if you want that option).
• Family trust: Usually narrows the class to a defined family group (e.g. a couple, their children, and certain related entities), which may simplify distribution decisions and align with a family’s long‑term plan.

2) Tax Settings And Elections

• Discretionary trust: Offers year‑to‑year distribution flexibility. No specific election is required, but tax rules still apply.
• Family trust: Often goes hand‑in‑hand with a family trust election. This can affect who you can distribute to without tax penalties and how certain tax benefits are accessed. Your accountant will guide you here.

3) Control And Succession

• Both structures are controlled through the trust deed and the key roles (trustee, appointor, and beneficiaries). A family trust typically embeds succession within the family group, which can make handovers smoother if planned well.

4) Asset Protection

• Both can be effective when set up and run properly. Using a corporate trustee often strengthens protection because the company, not an individual, enters into obligations on behalf of the trust.

5) Business Growth And Investors

• Discretionary trusts are great for family‑owned businesses, but they can be tricky for bringing in unrelated investors. If you’re planning to raise outside capital or offer equity incentives more broadly, consider whether a company structure (with shares) or a unit trust (with units) will be a better long‑term fit. For unit trusts, governance is commonly documented in a Unitholders Agreement.

Who Are The Key Players In A Trust (And Why They Matter)?

Whichever path you choose, getting the roles right is crucial. The trust deed sets the rules, but people fill the seats.

• Settlor: The person who starts the trust by making a nominal settlement (often a small sum) and is not a beneficiary. Their role is limited, but it needs to be done correctly. If you’re new to this, it helps to understand the role of a settlor at a high level.
• Trustee: The decision‑maker and the legal party to contracts. This can be an individual or a company. Many small businesses use a corporate trustee for better separation and continuity. If you opt for a corporate trustee, a straightforward way to get started is a Company Set Up that’s suitable for acting as trustee.
• Appointor (or Principal): Often holds the power to remove and appoint the trustee. This is a powerful role - ensure you choose someone you trust, and plan succession in your deed.
• Beneficiaries: The people or entities who may receive income or capital. In a family trust, this is typically limited to a defined family group.

These roles - and how they interact - are all defined by the trust deed. The deed is the trust’s “rulebook”, so it’s worth investing the time to get it right from day one.

How Do You Set Up And Run A Trust In Australia?

Setting up a trust involves a few careful steps. Here’s the typical flow.

Step 1: Choose Your Structure And Roles

Decide whether a discretionary trust configured for a family group is right for you, or whether you need a broader discretionary trust (or even a unit trust or company). Then choose your trustee (individual or corporate), appointor, and prospective beneficiaries.

Step 2: Draft And Execute The Trust Deed

The deed sets the parameters: who the beneficiaries are, how distributions are made, who controls the trustee, how to add or remove beneficiaries, and what happens on winding up. Make sure the deed is clear, practical and aligned with your plans. In Australia, a trust deed is a legally binding deed, so proper execution (and state stamp duty rules, if any) matters.

Step 3: Set Up Your Trustee Company (If Using One)

If you’re using a corporate trustee, incorporate that company and keep its purpose clear (acting as trustee). Keep ownership simple and, where appropriate, consider how shares are held to align with your control and succession plan.

Step 4: Register The Trust For Tax And Business Purposes

Apply for the trust’s Tax File Number (TFN), and if you’ll be carrying on a business, consider whether you need an ABN and GST registration. The basics of trust requirements like ABN/TFN/GST are worth mapping out early with your accountant.

Step 5: Open A Bank Account And Document Resolutions

Open a bank account in the trustee’s name “as trustee for” the trust, keep accurate records, and prepare trustee resolutions for distributions and key decisions. Year‑end distribution resolutions are especially important for discretionary trusts.

Step 6: Keep Running Properly

Operate the business in the trustee’s name (as trustee for the trust), sign contracts consistently, maintain records, and keep the deed and control settings up to date as your business evolves. If the trust will hold shares in a trading company, consider how those shares are held and controlled - many founders look at beneficially holding shares through a trust for flexibility and protection.

When Does A Trust Structure Make Sense For A Small Business?

Every business is different, but here are common scenarios where a discretionary (family) trust is considered.

• Family‑Owned Businesses: You want to run a business for the benefit of a family group and distribute profits flexibly within that group each year.
• Asset‑Holding And Risk Separation: You want the trust to hold key assets (e.g. IP or property) and license or lease them to a separate trading entity, adding another layer of protection.
• Succession Planning: You want control mechanisms that work for multi‑generational ownership and a smoother handover over time.

If your roadmap includes external investors, employee equity, or a potential sale of shares to third parties, consider whether a company (with shares) or a unit trust (with units) will better support those goals. For unit trusts, you’ll typically want a clear Unitholders Agreement to govern decision‑making and exits.

Legal Documents And Governance You’ll Likely Need

Trusts live or die by their paperwork and governance. Here’s a quick checklist of documents that small business owners typically put in place.

• Trust Deed: The core document that sets out how the trust works, who benefits, and who has control. It should be tailored to your family group and business objectives.
• Corporate Trustee Documents (If Using A Company): Company registration records and, where relevant, a simple governance pack. Many owners establish the trustee via a streamlined Company Set Up focused on acting as trustee.
• Bank Resolutions And Distribution Resolutions: Board/trustee records authorising accounts, declaring distributions, and documenting key decisions each year.
• Customer And Supplier Contracts: If the trust is the trading vehicle, make sure your Customer Terms, Supply Agreements and other contracts clearly name the trustee “as trustee for” the trust.
• IP Ownership And Licensing: If you separate IP into a holding trust or entity, put written licences in place so your trading entity can use that IP on agreed terms.
• Employment Agreements And Policies: If hiring staff, use clear Employment Agreements and workplace policies so obligations sit with the correct entity (the trustee/trust).

Set these up well at the outset and you’ll avoid many common admin and risk headaches later.

Common Pitfalls To Avoid

A trust can be powerful, but there are recurring traps we see with small business owners. Keep an eye on these.

• Inconsistent Naming: Signing contracts in your personal name instead of the trustee “as trustee for” the trust. This can undermine the structure.
• Missing Or Late Distribution Resolutions: Discretionary trusts rely on timely resolutions. Leaving it to the last minute risks errors and tax issues.
• Unclear Control: Not planning appointor/trustee succession, which can cause disputes or loss of control at critical moments.
• Using The Wrong Vehicle For Growth: Trying to bring in third‑party investors through a discretionary trust, when a company or unit trust would have been more practical.
• Blurring Personal And Trust Money: Mixing funds or poor record‑keeping can cause compliance and liability problems. Keep clean books and distinct bank accounts.

Key Takeaways

• A “family trust” is usually a discretionary trust designed for a family group - the difference is practical, not a separate legal type.
• The trust deed and control roles (trustee, appointor, beneficiaries) determine how your trust works; get these right for flexibility, protection and succession.
• Consider a corporate trustee for added protection and cleaner separation between personal and business risk.
• Plan your roadmap: if you’ll need outside investors or employee equity, a company or unit trust may suit better than a discretionary trust.
• Set up basics early - TFN/ABN, bank account, annual resolutions - and ensure all contracts correctly name the trustee “as trustee for” the trust.
• Strong governance and clear documents reduce risk and make it easier to run (and grow) your business with confidence.

If you’d like a consultation on setting up or reviewing a discretionary (family) trust for your small business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.