Breaking down discretionary trusts in Australia
Discretionary trusts are unlike unit trusts where the trustees don’t possess any discretion pertaining to the trust, and the funds are simply distributed to the beneficiaries in allotted units.
When it comes to discretionary trusts, it’s vital that you understand all the nitty-gritties involved. There’s many legal and financial considerations that need to be scrutinized when applying for such a trust.
With that being said, there are a number of questions that need to be asked since the answers will lead you to a holistic comprehension of discretionary trusts. Let’s start with the first obvious bit of understanding before diving into the rest.
What exactly is a discretionary trust?
Defined, a discretionary trust is a type of loan on a property where beneficiaries do not have a fixed interest. The difference being that the trustee decides which of the beneficiaries will receive the trust funds and subsequently, how much each is entitled to receive. With that said, the trustee still has an obligation to comply with the rules and regulations stipulated in the trust deed.
They have nominated beneficiaries stated in the trust deed and this allows any and all income to be distributed to these beneficiaries when the occasion presents itself to bequeath the funds.
How much can I borrow?
That all depends. On what, you ask? Well, the lending policy is different with each individual borrower. There are three types of lending policies, with the first being an investment loan. These are loaned at 95% of the value of the property. The second type is a low doc loan which comes in at 80% of the value of the property. Lastly, you can obtain discounts, which is a competitive package that offers a basic loan discount.
How do the banks of Australia contribute to these trusts?
The unfortunate part of the discretionary trust business is that approximately half of all Australian lenders would sooner turn away clients on these loan types than assist them. The balance will happily refer you to departments that are capable of managing the delicacies of these types of trusts, but at a far higher rate than you’d expect.
In short, it’s not an easy-to-come-by option. The reason for this is that it’s such a complex process in terms of the legal structure that is involved. It’s also a mountain of work with little financial reward for the lender. As a result, approval is not nearly as likely as you’d think and you can count out any shopping around for competitive offerings, you’ll need to take what you can get!
How do I go about obtaining approval?
The easiest way to go about it is to source a lender that deals with discretionary trust loans on a regular basis and understands how to handle all the intricacies of the trust deed. This will simplify the loan application process and make you more likely to get approved.
Why is an expert so essential?
It’s simply in your favour to do so because financial specialists can advise you when it comes to all the pertinent information required for the prep, process and approval of the loan.
They know exactly which lenders are best suited for handling discretionary trusts and will point you in the right direction. They are also quite in tune with which of them are willing to offer professional discounts and offset accounts for discretionary trusts. They know which lenders don’t require guarantees from every beneficiary. Financial specialists also have the skills to structure loans with the right entities as borrowers and mortgagors.
Am I able to get a low doc?
Not always, unfortunately. Low doc discretionary trust loans are only offered by a few select lenders. You will find that certain lenders are restricted when it comes to loaning money to discretionary trusts where the company is a trustee versus a personal trustee which they can accept.
What are the benefits of a discretionary trust?
Where distribution is concerned, the trustee has the flexibility to distribute the funds to the beneficiary with the lowest taxable income.
Your assets are protected, which is a major benefit in the event that a beneficiary becomes insolvent or otherwise finds him/herself going through a divorce.
Legal action can seriously affect an individual or company when mishaps occur, however, with a discretionary trust there is a minimal risk and have minimum asset exposure.
There’s far less red tape with these types of loans and even though companies are quite complex when winding up, going the route of a trust is far simpler.
The deed is also customisable, meaning it can really be tailored to suit the needs of the beneficiaries of the trust.
Trust terms & definitions
Jargon is only fun for the someone already in the industry. For the rest of us, sometimes we’re a little unsure of who’s who and what's what in the zoo.
Trustee: The person responsible for the trust that has no vested interest in the trust as a beneficiary. The trustee elects the beneficiaries of the trust.
Appointer: This person appoints the trustee of the trust and also has the power to remove them as trustee.
Beneficiaries: These are the people to whom the assets, funds and income are bequeathed to in the trust.