A friend told me that a discretionary trust can only be set up between family members.
Can you set up a discretionary trust with friends that are not relatives?
Ryan McLean
http://CashFlowInvestor.com.au
Positive Cash Flow Properties Are Just A Click AwayRyan McLean | On Property
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Email Meryan mclean wrote:Can you set up a discretionary trust with friends that are not relatives?Yes, you can, in most cases.
A discretionary trust deed lists who can be a beneficiary of the trust, and usually allows for a large amount of beneficiaries. I have seen one trust deed that lists a beneficiary can be 'anyone on the electoral roll'.
If the trust has made a family trust election, (because of prior year losses etc) then this limits the beneficiaries to certain family members of the 'test individual'. But if the trust is making profits and has no need to lodge an FTE, then the beneficiaries are only limited by the trust deed.
Thank you so much. My friend hear this from an accountant…obviously the accountant didn’t know what he was talking about.
This is really good to know for everyone, especially people who invest together. Investing together using your own names is the worst, because you are both liable not only for your own actions but also for the actions of your partner. So using trusts is a great way to fix that problem,
Ryan McLean
http://CashFlowInvestor.com.au
Positive Cash Flow Properties Are Just A Click AwayRyan McLean | On Property
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Email MeRyan,
People who are non related and invest together are not going to want to be involved together as beneficiaries of a discretionary trust, because a discretioanry trust gives the trustee discretion in which beneficiaries receive income or capital.
A more common structure where non relatives are investing would be a unit trust and the investors would invest in the unit trust either directly or via their own discretioanry trust.
Why wouldn’t people want to invest in a discretionary trust together if they are both appointers and they are both directors in the company that is the trustee of the trust? Wouldn’t that then work?
I have not learned about unit trusts? Why are they better that discretionary trusts for investing with non-relatives?
Ryan McLean | On Property
http://onproperty.com.au
Email MeSimply because they are not discretionary. If I have invested 50% I want 50% of the profits, not 1% or 99% (maybe I do want 99%).
People use discretionary trusts so they can spread income amongst their family tax advantageously.
Basically similar set up costs
So I unit trust allows you to define how much income each person receives?
Or instead of a person the income can go into a discretionary trust, in which that trust can send the money to their beneficieries.
Let me use an example to see if I got this right.
Bill and Ted invest together in Property A. Bill and Ted each want 50% of the profits. They set up a unit trust with a company as the trustee and both of them as appointers. Each of them has a “unit” in the trust that defines the income they recieve (50%)? Is that right?
Ryan McLean | On Property
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Email MeI think the point is that Bill would have 10 units and Ted would have 10 units, being a unit trust, and that any profit or debt would be split based on the split of units.
Oh ok,
So could Bill have 51 Units and Ted had 49 units?
Ryan McLean
http://CashFlowInvestor.com.au
Positive Cash Flow Properties Are Just A Click AwayRyan McLean | On Property
http://onproperty.com.au
Email MeYou can set up a unit trust with any number of units in any amounts – 2, 100 or 1000 etc. They are good for 2 non related parties to invest because the profits go to the unit holders in proportion to their ownership.
eg 100 units, with 5 owned by Ted and 95 owned by Bill. Ted owns 5% and will get 5% of the profit.
Unit trusts don't usually have appointors – the person with the most units controls the trust, but this will depend on the wording of the trust.
They also offer no asset protection as the units are property and at at risk if you are sued.
But the units can be owned by a discretionary trust.
So if Bill and Ted were to invest using a unit trust with 50 shares each, they could each set up their own discretionary trust. Any profit would be distributed 50/50 into each person's Discretionary trust and from their the trustee of that trust could distribute it to the lowest income earners saving income tax. The important thing is each family unit can treat their own profit separately.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terry that is an excellent post and is also how I understand it.
As Terry said the important thing is each family unit can treat their own profit separately.
The way I understand it is if you only set up a discretionary trust then one of the trustees could potentially stream all the profit to themselves or any trustee or beneficiary of the trust without the other trustees or beneficiaries knowing and that is a dangerous thing.
Unit trust is the way to go if you want to go down the "friends invest together" path, use the individual family trusts as trustees if you want the added protection.There are other options involving companies but then you hit CGT implications again stick with the unit trust.
I doubt they could do it without you knowing, but they could still do it. A discretionary trust is risky when you are in a joint venture as the profits don’t have to be split correctly because the trustee uses their discretion. A unit trust guarantees that the profits are distributed a certain way, which is very reassuring in a joint venture.
If you decide to do a joint venture then it is also a good idea to have a lawyer draw up a joint venture agreement.
Ryan McLean | On Property
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