10 Benefits Of A Discretionary Trust Running A Business

Trusts have been around for centuries, and commercial law embraces them as a legitimate means to operate a business. Whilst there are many types of trusts, the one type that you are most likely to see used for businesses is a discretionary trust.

A discretionary trust operates on the basis that it has discretionary beneficiaries. These are the individuals and companies that may receive capital and income from the trust at the discretion of the trustee. Discretionary trusts have several benefits within the realms of running businesses, and here are ten of the most important.

Flexibility: One of the most cited reasons for using a discretionary trust to run a business is its flexibility. Trust deeds can now be amended to add or remove beneficiaries without any implications for stamp duty. It also allows the trustee to amend the trust deed to take account of new tax legislation and other laws, such as commercial law.

Tax Streaming: This is the legitimate practice of the trustee deciding each tax year, who to distribute the trust’s taxable income to. By streaming income proportionately to specific beneficiaries, especially those in lower tax brackets, and those who have had a capital loss, it reduces the amount of tax paid by the trustees across the board.

Tax Minimisation: In practice, this is similar to tax streaming as it means each beneficiary receives a proportionate amount of income, but it is done for different reasons. In the main, the income is distributed to an individual when it best suits their own needs, and in particular, what there their present tax position is. Again this minimises the tax payable by all beneficiaries.

Undistributed Income: Unlike a company that might wish to accumulate its income in the bank, a trust is more likely to distribute all income because its undistributed income is taxed at 45%. This means beneficiaries receive the maximum amount of income as a minimal amount of it is retained.

Capital Gains Tax Benefits: Individual beneficiaries (not companies) of a discretionary trust benefit from a 50% discount in capital gains tax once they have owned a share of the trust for 12 months. Also, should a company with less than £10m turnover wish to transition to a discretionary trust, it will be eligible for roll-over relief on CGT.

Capital Protection During A Divorce: The beneficiaries of a discretionary trust are protected should one of them be facing a financial claim from the ex-spouse of another individual beneficiary. This applies to both the income, which can be suspended whilst the divorce proceeds and the capital that the beneficiary owns.

Capital Protection Against Bankruptcy Of A Beneficiary: As a beneficiary of a discretionary trust you might be concerned if another beneficiary was facing bankruptcy. Fear not, as the capital of a discretionary trust is fully protected against any claims made against a beneficiary during their bankruptcy.

Protection Against The Trust’s Creditors: In a similar vein to how the shareholders and directors of a limited company are protected against liability to creditors, the same applies to discretionary trusts. In other words, the beneficiaries of a discretionary trust have no financial obligation to pay the trust’s creditors. Note this may not apply in all states with New South Wales being a notable exception,  so ask your commercial lawyer to confirm if it does in your state.

Beneficiary Protected By Appointees: Beneficiaries can benefit from the protection of appointees who will ensure that directors of the trustee company do not make decisions that negatively impact the interests of those beneficiaries. As such, an appointee will have to give consent to any major decisions those directors make relating to the trust.