A popular business, investment and tax planning vehicle, the establishment of a discretionary trust is not a difficult task. Indeed, a deed may be obtained “off-the-shelf”. But care is always needed to ensure that the deed as drafted is satisfactory from a trust law perspective and also has the requisite flexibility for taxation purposes (for example, that there is power to “stream” particular kinds of amounts and that the beneficiary class is wide enough).
It also needs to be understood that, despite the wide terms of a discretionary trust deed, issues of fiduciary duty (for example, where the appointor/guardian (or whatever) is also a discretionary object) or undue influence may arise. These issues may well become live issues where there is contention between the potential objects of a discretionary trust (for example, family members).
This article by John Gaal, author of Discretionary Trust Distributions, originally published in Taxation in Australia, considers several recent decisions which highlight different points, including inadequate powers of amendment, proper law of the trust, the power to vary, the meaning of "beneficiary" and the identification of the appointor/protector.
John Gall, founder of TaxCounsel, is the author of The Tax Institute title Discretionary Trust Distributions. Now in its third edition, this leading title examines the considerations that arise in relation to the making of distributions of income out of a typical discretionary trust, and covers the "streaming", anti-avoidance and primary producer trust amendments and much more.