Discretionary Trusts: What You Need To Know

Thinking about setting up a discretionary trust in Australia? You’re not alone. Many founders, family businesses and investors use trusts to manage assets, separate risk and plan distributions in a flexible way.

At the same time, trusts can feel complex if you’re new to them. There are roles to understand (trustee, appointor, beneficiaries), a trust deed to draft carefully, and ongoing compliance to stay on top of. The good news is that once you break it down, the moving parts are manageable - and with the right advice, a discretionary trust can be a powerful tool in your structure.

In this guide, we’ll walk through what a discretionary trust is, how it works, whether it might suit your situation, how to set one up, and the key legal and tax considerations to keep in mind in Australia.

What Is A Discretionary Trust In Australia?

A discretionary trust (sometimes called a family trust) is a legal arrangement where a trustee holds and manages property or income on behalf of a group of potential recipients - the beneficiaries. The trustee decides, at their discretion, which beneficiaries receive income or capital in each distribution period.

The trustee owes legal duties to act in line with the trust deed and in the best interests of the beneficiaries. The trust deed is the foundational document: it sets out who is involved, what the trust can do, how decisions are made, and how distributions work. An appointor (if the deed includes this role) often has the power to appoint or remove the trustee, which effectively gives them ultimate control over who manages the trust.

Discretionary trusts are a common choice for families and private businesses because of their flexibility and the potential to manage risk and tax outcomes. For a broader overview of how different trust types support asset protection and planning, it’s worth reading about trusts in Australia and how they’re used in business contexts.

Is A Discretionary Trust Right For Your Business Or Family?

Before you set up a trust, it’s important to pressure-test whether it fits your goals, risk profile and practical needs. Ask yourself:

• Control and flexibility: Do you want the ability to decide how much income each beneficiary receives year to year?
• Asset protection: Do you want to separate trading risk from personal assets by holding ownership in a trust?
• Succession planning: Is it helpful to centralise assets under a trust to simplify future transitions?
• Profit flow: Will the trust receive business profits (e.g. via a corporate beneficiary or a service trust), investment income, or both?
• Complexity tolerance: Are you comfortable with record-keeping, resolutions and distribution paperwork each year?

If your primary goal is simply to hold an asset for a single person with no discretion, a bare trust may be more appropriate. Alternatively, some family arrangements consider longer-term or fixed features, including structures that are closer to irrevocable trusts (noting this is a distinct concept with significant constraints).

Where a trust is being used as part of a broader business structure, founders often pair a discretionary trust with a company. For example, the trust may hold shares in the trading company or receive distributions via a “bucket company” strategy. If you’re weighing options, it helps to understand how holding companies can fit into risk management and ownership planning.

How Do You Set Up A Discretionary Trust?

Setting up a discretionary trust is a legal process. The exact steps depend on your state or territory and your intended use, but it typically looks like this:

1) Define The Purpose And Participants

Start with the basics. Who will be the trustee (an individual or a company)? Who will be the appointor? Who will be in the class of beneficiaries? What assets will be settled into the trust initially, and how will the trust be used (holding shares, intellectual property, real property, or receiving business income)?

Choosing a corporate trustee is common for asset protection and continuity. If you go down this path, you’ll need to establish the company and adopt an appropriate Company Constitution so the director and shareholder rules align with your trust governance.

2) Draft The Trust Deed

The trust deed is the core legal document. It sets out how the trustee must exercise its discretion, how beneficiaries are defined, powers around distributions of income and capital, rules for adding or removing beneficiaries, and processes if the trustee changes. It should also address practical questions like indemnities, trustee fees (if any) and decision-making mechanics (e.g. written resolutions).

A well-drafted deed gives you the flexibility you want while avoiding ambiguity that can trigger disputes later. If the trust will hold shares or other business assets, make sure the deed accommodates those activities and any related agreements.

3) Decide On Trustee Structure

You can appoint either an individual trustee or a corporate trustee. Many people opt for a corporate trustee to keep personal and trust liabilities separate and to make changes easier down the track (e.g. changing company directors rather than re-registering assets held in an individual’s name). If you take this path, complete your company set up before you execute the trust deed so the company details are correct in the document.

4) Execute The Deed Correctly

Execution formalities matter. Ensure the deed is executed in accordance with the requirements for deeds in your state (e.g. witnessing rules) and, if you have a corporate trustee, that it signs in line with section 127 of the Corporations Act or as permitted by its constitution. Keep original signed copies safe and store digital copies securely.

5) Attend To Registrations And Tax Settings

Most discretionary trusts apply for a Tax File Number (TFN) and, if required, an Australian Business Number (ABN) and GST registration. The specifics will depend on what the trust will do - for instance, trading or investing - and your turnover projections. For a practical overview of numbers and registrations, see trust requirements in Australia and how TFN/ABN/GST interact with trusts.

6) Open A Bank Account And Put Governance In Place

Open a bank account in the name of the trustee “as trustee for” (ATF) the trust. Put simple governance processes in place: minutes and resolutions for key decisions, a distribution timetable before 30 June each year, and instructions for your accountant and lawyer on how you want decisions recorded.

How Do Distributions And Ownership Work?

In a discretionary trust, beneficiaries don’t own a fixed slice of the trust property. Instead, they have a right to be considered by the trustee when distributions are made. The trustee decides who receives income or capital in a given year, in line with the deed and their duties. This is why clarity in the deed and consistent governance are so important.

Many founders use a trust to hold shares in a private company. That way, dividends (if any) can be distributed to the trust and then streamed to beneficiaries. If you’re exploring this route, it’s worth understanding how beneficially holding shares through a trust works in practice, including how the share register records the trustee’s legal ownership and the trust’s beneficial ownership.

Sometimes a trust won’t distribute cash but will instead transfer an asset to a beneficiary. This is known as an in specie distribution. Your deed should allow for this if it’s part of your strategy, and you should consider any duty or tax implications with your accountant before proceeding.

Key Legal And Compliance Considerations

Even though a trust isn’t a separate legal entity in the same way a company is, there are still clear legal responsibilities to manage. Here are the essentials to keep on your radar.

Trustee Duties And Decision-Making

The trustee must follow the deed, act in good faith, keep proper records, and make decisions for the benefit of beneficiaries. If the trustee is a company, directors must also comply with their general directors’ duties under the Corporations Act (act with care and diligence, for a proper purpose, and in the best interests of the company as trustee).

Asset Protection And Liability

One reason people choose discretionary trusts is asset segregation. Typically, liabilities of the trust sit with the trustee in its capacity as trustee, and there are indemnity rights against trust assets (subject to the deed and any limitations). Using a corporate trustee can help ring-fence exposure in practice, but it’s not a silver bullet - lenders may still ask for personal guarantees, and some risks (like trustee breaches) can pierce protections. Where the trust sits within a group, consider how holding companies or service entities fit into your overall asset protection strategy.

Tax And Registrations

Trusts are generally flow-through for tax purposes, with income distributed to beneficiaries who then pay tax at their marginal rates. If income is retained in the trust without a valid default beneficiary or within the rules of the deed, penalty tax can apply. You’ll need a TFN, and an ABN/GST if the trust carries on an enterprise above the relevant thresholds. Work with your accountant on distribution minutes, any family trust elections, and documentation before year-end to avoid inadvertent tax issues.

Records, Resolutions And Year-End Workflow

Keep clean records of trustee resolutions, beneficiary appointments, and any changes to roles like appointor or guardian (if your deed uses that term). Aim to prepare distribution resolutions in advance of 30 June each year. This discipline reduces the risk of errors, “default” outcomes you didn’t intend, or disputes among family members later.

When A Trust Owns Business Interests

If your trust will hold shares in a trading company, make sure the company’s governance documents align with your trust strategy. That might include the company’s constitution, share classes and dividend rights, board composition, and how exits or capital raises would work. If the company is being formed or updated, adopting a tailored Company Constitution early can save headaches later.

Common Mistakes With Discretionary Trusts (And How To Avoid Them)

Most trust problems arise from paperwork gaps or misaligned expectations. Here are pitfalls we see often - and how to stay clear of them.

• Vague or outdated deeds: If the deed is vague on key powers, or doesn’t reflect how you actually want to operate, you invite disputes. Use a clear, modern deed drafted to suit your purpose.
• No corporate trustee when it’s needed: Individual trustees can complicate asset transfers or succession. A corporate trustee often provides cleaner governance and separation.
• Missing or late distribution minutes: Leaving year-end resolutions to the last minute can cause tax disadvantages. Build a calendar with your accountant and lawyer well before 30 June.
• Confusing trust and personal funds: Keep a dedicated bank account and don’t mingle funds. Record all loans or reimbursements properly.
• Ignoring succession: If the appointor passes away or loses capacity without a clear succession plan, control uncertainty can follow. Document appointor succession and keep it current.
• Using the wrong trust type: A discretionary trust isn’t always the right answer. For some use cases, a bare trust or a more permanent arrangement such as aspects of irrevocable trusts might better fit your goals and constraints.

Essential Documents For A Discretionary Trust Structure

Every structure is different, but most discretionary trust setups will rely on a core set of documents and policies to operate smoothly.

• Trust Deed: The master document setting out the trust’s rules, powers and participants. This should be tailored to your purpose and signed correctly.
• Trustee Resolutions: Minutes or written resolutions for distributions, major decisions, and changes to roles. Keep these up to date each year.
• Corporate Trustee Documents (if applicable): Certificate of registration, share register, director appointments, and a fit-for-purpose Company Constitution.
• Shareholder Records (if the trust holds company shares): Share certificates, registers and any side agreements reflecting the trustee’s legal title and the trust’s beneficial ownership.
• Banking And Accounting Policies: Clear processes for payments, reimbursements and loans to avoid mixing funds.
• Group Structure Map: A diagram that shows how the trust relates to companies or other trusts (including any holding companies), and where assets sit. This helps keep decisions consistent with the bigger picture.

If your trust will receive non-cash assets as part of a restructure or estate plan, plan ahead for any in specie distribution steps and note any state-based duty or transfer requirements that may apply.

Step-By-Step: Bringing Your Discretionary Trust To Life

Step 1: Outline Your Goals And Structure

Decide what the trust will hold, how profits will flow, and who should control trustee appointments over time. Capture this in a simple one-page brief for your lawyer and accountant.

Step 2: Choose Trustee And Draft The Deed

Confirm whether you’ll appoint a corporate trustee and who the first directors and shareholders will be. Draft the deed to reflect your distribution rules, appointor powers and practical governance you’ll actually follow.

Step 3: Execute, Register And Set Up Accounts

Sign the deed correctly, apply for the TFN and any other registrations the trust needs, then open the bank account in the trustee’s name ATF the trust. Put a basic distribution calendar in place.

Step 4: Document Ownership And Operations

If the trust will own company shares, make sure the company records reflect the trustee as registered holder and that beneficial ownership is noted appropriately. Where the trust will hold operating assets, consider whether the trust or a company should conduct trading activity (and how risks are isolated).

Step 5: Keep Up Governance And Year-End Tasks

Schedule resolutions ahead of 30 June, keep minutes tidy, and coordinate with your accountant on family trust elections or beneficiary tax profiles. Review the deed every few years to ensure it still matches your plan.

Key Takeaways

• A discretionary trust lets a trustee decide how to distribute income and capital among beneficiaries, providing flexibility for families and private businesses.
• The trust deed is critical: it defines roles, powers and processes. Make sure it matches how you intend to operate and is properly executed.
• Choosing a corporate trustee is common for asset protection and ease of succession, and it should be supported by a suitable Company Constitution.
• Attend to practical setup steps early: TFN/ABN and GST (if required), a dedicated bank account, and a clear schedule for distribution resolutions before 30 June.
• If the trust will hold company shares or business assets, align your company records and group structure so governance and distributions work smoothly.
• Document decisions, avoid mixing funds, and revisit your deed and appointor succession over time to prevent disputes and protect the structure.
• Trusts come in different forms; in some scenarios a bare trust or more fixed arrangements may be better suited than a discretionary trust.

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