How Setting Up a Discretionary Trust and Using it Can Protect Your Assets From Bankruptcy

Dominique Grubisa
Dominique Grubisa

Published 2:31 am 6 Mar 2020

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Have you thought about creating a discretionary trust? Australia offers several ways to protect assets, and this is one of them. DG Institute’s Dominique Grubisa explains what it is and how it can protect you.

How To Set Up a Discretionary Trust?

  1. Select a Trustee
  2. Write the Trust Deed
  3. Settle the Trust
  4. The Trustees Sign the Deed
  5. Pay Stamp Duty (Possibly)
  6. Apply for an Australian Business Number (ABN) and Tax File Number (TFN)
  7. Open a Trust Bank Account

A lot of novice investors make the same mistake.

In their rush to start their investing journey, they don’t stop to think about their tax and asset structures. Instead, they find an opportunity and buy in their own name to get things moving faster.

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And in an ideal world, this wouldn’t cause any issues. 

Unfortunately, owning property in your own name will come back to bite you if you ever face the prospect of bankruptcy. If your investing career doesn’t go as you expected, those assets are now at the mercy of your creditors.

So what can you do about all these issues surrounding bankruptcy and assets? How can you protect yourself in the worst-case scenario?

You should be asking yourself, what is asset protection?

And, depending on your circumstance, a discretionary trust may be the answer.

What is a Discretionary Trust?

If you’re reading this article, you likely want to find out how to protect assets from bankruptcy. The answer may lie in a discretionary trust. Australia offers several trust structures, each of which has a different purpose.

So, how does a discretionary trust work?

According to Legal Vision:

“A discretionary trust is often used as a device for splitting the income of a family group by channelling the earnings of the family through to separate individuals.”

However, that is far from this type of trust’s only use. You can use a discretionary trust to buy shares and other business interests. And, most important for our purposes, you can use a discretionary trust to invest in property.

In the case of property investment, all income that the investments generate goes back into the trust. So if you have a tenant who’s paying $500 per week, all of that money goes into the discretionary trust.

The key here is that the trust owns the asset.

You don’t.

However, you can be a beneficiary of the trust. This means that you stand to make money when the trustee decides it’s time to distribute the trust’s income.

So, how does putting assets into a trust protect them?

As a beneficiary, you have no direct interest in the property that the trust owns. As such, if you were to face bankruptcy or other claim-related issues, the asset is protected by the trust. Your creditors will find it very difficult to make a claim against the asset, because you don’t own it.

Unfortunately, this system isn’t perfect. In some cases, creditors may be able to identify you as a beneficiary and go after the asset despite it being in a trust structure.

That’s where Vestey Trusts come in. We won’t go into detail here, as we’ve written about them in another article. However, they’re a good option if you don’t feel like a discretionary trust will suit your needs.

The Steps for Setting up a Discretionary Trust

We’ve established some of the benefits of a property investment trust structure.

Now, you need to know how to create a discretionary trust. The good news is that it’s not an especially difficult process. The following are the seven steps you need to follow.

Step 1 – Select a Trustee

The trustee is the person who will oversee the trust and determine how it distributes its income. They act in accordance with the trust deed. They also have the responsibility of ensuring that the trust complies with all relevant laws.

A trustee can be either an individual or a private company. It’s recommended that you use a private company, as this further reduces the risk of personal liability.

Step 2 – Write the Trust Deed

We mentioned the trust deed above. This is a legal document that details how your discretionary trust will operate. Make sure you work with a legal professional when drafting this document.

Step 3 – Settle the Trust

Once the deed is drafted and the trustee assigned, you’ll call on the services of a settlor. This is the person, unrelated to the trust, who will sign the trust deed. Settlors also pay a nominal sum, usually about $10, into the trust.

Most people ask their accountant to be the settlor.

Step 4 – The Trustees Sign the Deed

Once the settlor signs, any trustees must also sign the trust deed. Note that you can have multiple trustees in a discretionary trust. Australia’s laws dictate that all trustees must sign the deed for it to be valid.

Step 5 – Pay Stamp Duty (Possibly)

Each state has its own laws in place when it comes to the stamp duty on a discretional trust. For example, you’ll have to pay $500 within three months of forming a trust in New South Wales.

Speak to your state’s revenue authority to confirm if stamp duty applies to your trust. Pay it as quickly as possible if it does, or you may accrue interest on it.

Step 6 – Apply for an Australian Business Number (ABN) and Tax File Number (TFN)

You can make the applications for these numbers online. However, it’s best to involve a legal professional to ensure you get the process right. Expect to wait up to 28 days after applying to receive your numbers.

Step 7 – Open a Trust Bank Account

This bank account is opened by the trustee in their role as trustee for the discretionary trust. It’s best to leave this step until last, as your bank may ask for the trust’s ABN before opening an account.

Upon opening the account, deposit the settlement sum into it.

The trust can now begin accepting deposits and making transactions in accordance with the trust deed.

Are You Ready to Set Up Your Trust?

Now that you know how, it’s time to set up your trust.

A discretionary trust will certainly provide some protection. And the team at DG Institute can help you to create yours with their professional services.

However, this isn’t the perfect property investment trust structure.

To learn more about asset protection, register now for our emergency webinar briefing where you’ll learn how to safeguard your wealth while you profit safely.

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Good Debt Vs Bad Debt With Dominique Grubisa - DG Institute

Lawyer, Asset Protection Specialist and Property Educator

Dominique Grubisa is a practicing lawyer with over 25 years experience. She is a property investor and developer, an entrepreneur with businesses in Australia and Southeast Asia, a speaker, educator, writer and published author.

This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.

About DG Institute

Founded in 2009, DG Institute strives to empower everyday Australians to grow and protect their wealth. Our goal is to provide direction, motivation and inspiration to our clients and help them perform at their very best. We do that through our professional services, in addition to teaching them how to grow their wealth through property and business education.

This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.

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