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When you want to set up a discretionary trust, how do you actually do that? Who needs to be involved and who does what?
Set Up a Discretionary Trust
Paul Mackenroth of Cleary Hoare in Brisbane will walk you through the process in the episode to these show notes. Here are 10 things we learned from the interview with Paul.
To listen while you drive, walk or work, just access the episode through a podcast app on your mobile phone.
#1 The settlor should be a third party
A lawyer or accountant is usually the settlor and contributes $10 as settlement.
# 2 Settlor and beneficiary not in one person
You could have the settlor and beneficiary in one person but there are tax consequences, so the settlor is usually a third party.
# 3 The appointor has ultimate control
We always focus on the trustee, but in the end the appointor has ultimate control of the trust since the appointed can change the trustee.
# 4 Most modern trust deeds have an appointor
You can set up a trust without an appointor, but most modern trust deeds have one.
# 5 The appointor is usually the primary beneficiaries
In most scenarios the primary beneficiary would be the appointor. It is the person who the client wants to put in ultimate control of the trust.
# 6 Appointor is a personal role, not a proprietary role
In the past liquidators and trustees in bankruptcy have tried to say that the appointor is a proprietary role. But the courts have said that this is not the case. That it is a personal role.
Family law is different. They look at whether the appointor / trustee is the alter ego. That is the word they use: Alter Ego.
# 7 Trustee can’t be the only beneficiary
A trustee can be a beneficiary but the trustee can’t be the only beneficiary.
# 8 Most Trusts start with a settlement of $10
The trust usually starts with $10 but after that the trust can receive a gift of equity.
# 9 Keeping the equity for your main residence in the trust
If you buy a main residence through a trust, you can’t claim the main residence exemption. So you buy the main residence in individual names.
But how to give your main residence asset protection? You gift the funds to the trust and the trust then lends it back to you but registers a mortgage on the property. You basically treat the trust as a bank.
So if you ever have creditors coming for your home, you have the trust holding a mortgage over it.
# 10 Anybody can write a trust deed
You don’t have to be a registered lawyer to write your own trust deed. You can’t provide legal services to others, but you can always write your own trust deed.
# 11 Some states charge stamp duty, some don’t
In Queensland there is no stamp duty to set up a trust. Only dutiable transactions need to be stamped. But the creation of a trust is not a dutiable transaction. You set it up with cash. And cash is not dutiable property.
Tasmania, Victoria and NSW charge stamp duty for a trust deed.
# 12 In most states you can’t register the trust relationship in the land title registry, in Queensland you can
In Victoria and NSW you can’t register the trust relationship for a land title, but in Queensland you can.
Queensland gives the trustee the choice whether they want to register the title just in the trustee’s name or listing the trust relationship.
This is important for the acknowledgement of trust in a super fund that we covered in episode 56. In that episode we originally stated that no land title register in Australia registers a trust relationship and that you therefore always need an acknowledgement of trust for property held in an SMSF. But we forgot about Queensland. Sorry about that. We will fix ep 56.
In Queensland you can register a trust relationship in the land title register and hence wouldn’t need an acknowledgement of trust for that property when held in an SMSF.
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Disclaimer: Tax Talks does not provide financial or tax advice. This applies to these show notes as well as the actual podcast interview. All information on Tax Talks is provided for entertainment purposes only and might no longer be up to date. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s personal circumstances.
Last Updated on 04 May 2020
Tax Talks spoke to Paul Mackenroth - Senior Associate at Cleary Hoare - for more details.
