Discretionary (family) trusts explained
A discretionary trust, commonly called a family trust, is a trust in which the trustee has discretion over how income and capital are distributed among a defined class of beneficiaries each year. This flexibility is the primary reason discretionary trusts are one of the most popular structures in Australian tax and estate planning.
The trust is established by a trust deed, which defines the trustee’s powers, the class of beneficiaries (typically a wide class including family members, related entities, and charities), and the terms on which income and capital can be distributed. A discretionary trust also has a settlor, the person who establishes the trust, usually with a nominal settlement sum (often $10 or $20). The settlor should not be a beneficiary of the trust.
The key advantage of a discretionary trust is income splitting. Each financial year, the trustee can decide how to allocate the trust’s net income among the beneficiaries, directing income to those with lower marginal tax rates. This can produce significant tax savings for a family group compared to holding assets in a single individual’s name. However, the rules around trust distributions have become more complex following the Bamford decision and subsequent legislative amendments.
A corporate trustee is generally recommended over an individual trustee. A corporate trustee provides limited liability protection (the individuals behind the trust are generally not personally exposed to the trust’s liabilities, although directors can be liable under section 197 of the Corporations Act if the company is not entitled to be indemnified from trust assets, and lenders often require personal guarantees), continuity (the trust is not affected by the death or incapacity of an individual), and clearer separation of trust assets from personal assets.
At CoSec Partners, discretionary trust deeds cost $264 including GST. Every deed is individually drafted and signed off by Key Legal, an independent external law firm. Key Legal is responsible for its legal review and holds professional indemnity insurance as required of Australian legal practices. CoSec Partners is not a law firm and does not give legal advice.
Frequently asked questions
Who controls a discretionary trust?
Day to day, the trustee controls the trust because it holds the assets and makes the distribution decisions. Ultimate control usually sits with the appointor, the person named in the deed with power to remove and replace the trustee. Succession of the appointor role is often the most important clause in the deed.
Can a family trust distribute to a company?
Yes, if the company falls within the class of beneficiaries defined by the deed, which most family trust deeds are drafted broadly enough to allow. Following the High Court’s 2026 decision in Bendel, an unpaid distribution to a company is not a Division 7A loan simply because it is unpaid, but Subdivision EA and section 100A can still apply, and under the proposed minimum tax on discretionary trusts corporate beneficiaries would get no credit for the tax paid by the trustee. This should be planned with the trust’s tax adviser.
Do I need a corporate trustee for a family trust?
It is not compulsory, but it is generally recommended. A corporate trustee generally keeps the individuals behind the trust from being personally exposed to its liabilities (subject to directors’ liability under section 197 of the Corporations Act and any personal guarantees), survives the death or incapacity of an individual without a change of trustee, and keeps trust assets clearly separate from personal assets.
What is the difference between a family trust and a family trust election?
A family trust is a structure. A family trust election is a separate tax election lodged with the ATO that treats the trust as a family trust for income tax purposes, locking distributions to a defined family group in exchange for access to franking credits and prior-year losses. The two are often confused.
This article is general information only and does not constitute legal, financial, or tax advice. While we endeavour to keep content accurate and current, laws and regulations change frequently. For advice specific to your circumstances, please consult a qualified professional adviser. CoSec Partners Pty Ltd accepts no liability for actions taken based on this content.