Guide on Trust Funds – Part 3

Bank account

After the deed is executed, the trustee should arrange for a bank account to be set up as soon as possible. The name on the bank account should be along the lines of the following:

“XXX Pty Ltd as Trustee for the XXX Discretionary Trust”

The bank account used by the trust should not be used as a personal bank account. This is because adverse tax consequences may arise where beneficiaries draw money for their own use.

Investments

Trustees generally have unlimited powers in deciding in what to invest. The trustee’s powers are set out in the trust deed, but the trustee has a responsibility to exercise skill and care in making their investment decisions. This rule basically says that the trustee should ensure they take the same degree of care that a prudent person would take in making investment decisions, given their skills and knowledge.

When does a discretionary trust start?

A discretionary trust is created when a person known as the “settlor” gives the trustee money or property for the benefit of the beneficiaries. This “settled sum” is the original trust fund. The settlor is normally a family friend and should not be a beneficiary of the trust, or anyone similar if they could be seen to benefit or receive money from the trust (e.g., if it could be argued the settled sum has been refunded to the settlor). No other legal obligations arise for the settlor, who is not responsible in any way for the trustee’s actions.

It is often a good idea for the trustee to open a bank account to deposit the settled sum shortly after the deed has been executed – this can provide further evidence regarding the date the trust was settled.

A trust deed may be subject to stamp duty. The stamp duty (if any) can vary from one State or Territory to another, and the deed normally needs to be stamped within a limited time period after being executed.

Traps for the unwary

Listed below are some common traps which may be exposed on an ATO audit or to other dangers:

• No dated and stamped trust deeds;
• Shares in a corporate beneficiary are held by the primary beneficiaries – asset protection may not be achieved if this is done;
• The trust bank account was opened some months after the date shown on the trust deed (which then looks like the deed has been back-dated);
• No evidence of the settled sum ever being paid;
• If the trustee is a company, no evidence that the board of directors resolved to accept the position of trustee in accordance with its constitution;
• The terms of the trust deed have not been followed;
• No written minutes showing distribution of income or capital; and
• Trustees or beneficiaries using the account as their own – which exposes them to tax or other consequences for breaches.