Discretionary Family Trust Explained Under Australian Law

In Australian estate planning and business structuring, the discretionary family trust remains a preferred legal vehicle for families seeking to control assets, manage tax outcomes, and ensure intergenerational wealth protection.

Although commonly used, its nature is frequently misunderstood. A discretionary family trust is not an entity, but a fiduciary relationship created and governed by equity, statutory law, and the express terms of a trust deed.

When properly drafted and administered, it becomes a legally robust mechanism combining flexibility, confidentiality, and protection—attributes recognised and preserved by Australian courts for over a century.

For families or business owners unsure how to begin, understanding find a good family lawyer is essential before drafting or executing a trust deed, ensuring the structure complies with Australian trust and taxation law.

Legal Definition and Framework

Under Australian law, a discretionary family trust is a relationship in which a settlor transfers property to a trustee to hold for the benefit of a defined class of beneficiaries, usually members of one family group.
The trust is regulated primarily by:

• State and Territory Trusts Acts (e.g., Trusts Act 1973 (Qld), Trusts Act 1958 (Vic));
• Equitable principles of fiduciary administration; and
• Federal taxation legislation, particularly Income Tax Assessment Acts 1936 and 1997 (Cth).

The trustee holds legal title, but beneficiaries possess equitable interests, a distinction affirmed in Commissioner of Stamp Duties (Qld) v Livingston [1965] AC 694.

“A discretionary trust functions through the tension between legal title and equitable benefit—equity enforces conscience where statute provides form.”
— LegalFinda Trust Law Commentary 2025

Core Legal Features of a Discretionary Family Trust

1. Discretionary Power of Distribution: The trustee determines which beneficiaries receive income or capital, and in what proportions, within the limits of the trust deed. This power is fiduciary in nature and must be exercised in good faith, for proper purpose, and without bias or conflict.
2. Governance by Deed and Equity: The trust deed is the primary governing instrument. Courts interpret its terms according to settled equitable principles and the settlor’s intention. Any deviation without proper variation may render distributions void or trigger resettlement.
3. Limited Beneficiary Entitlement: Until a distribution is resolved, beneficiaries possess only a “mere expectancy.” They have standing to ensure due administration but not proprietary ownership of trust property.
4. Control Mechanisms: The appointor holds decisive control—the power to remove or appoint trustees. This ensures strategic continuity across generations.

Establishing a Discretionary Family Trust: Legal Requirements

The legal process of establishing a discretionary family trust in Australia must satisfy both formal and substantive requirements.

Procedural Steps:

1. Draft the Trust Deed — prepared by a solicitor, defining powers, beneficiaries, and appointor provisions.
2. Settle Initial Property — the settlor provides nominal consideration to evidence creation.
3. Appoint a Trustee — ideally a corporate trustee to limit personal liability under the Corporations Act 2001 (Cth).
4. Execute the Deed — witnessed, dated, and stamped where applicable.
5. Register for ABN and TFN — for ATO and compliance purposes.
6. Maintain Annual Resolutions — before 30 June each financial year to determine income distribution.

Failure to comply with any of these steps can render the trust void ab initio or expose the trustee to taxation at the maximum marginal rate under section 99A ITAA 1936.

Legal Distinction: Discretionary Trust vs Fixed Trust

Although both discretionary and fixed trusts are recognised under Australian law, they differ significantly in structure, control, and legal consequence. The following comparison outlines the principal distinctions that practitioners and beneficiaries should understand when determining which structure aligns with their objectives:

• Beneficiary Rights: In a discretionary family trust, beneficiaries hold only an equitable expectancy — they are not entitled to any fixed share of income or capital until the trustee makes a resolution. In contrast, a fixed trust provides beneficiaries with a legally enforceable entitlement to a specified proportion of the trust income or property.
• Control Mechanism: A discretionary trust grants the trustee broad powers of discretion, constrained only by fiduciary duties and the trust deed. A fixed trust, however, restricts trustee control — distributions must follow the fixed proportions set out in the deed, leaving no discretion to alter beneficiary entitlements.
• Taxation: For discretionary trusts, income is distributed at the trustee’s discretion, and beneficiaries are taxed individually on their share of trust income once they become “presently entitled” under Division 6 of the Income Tax Assessment Act 1936 (Cth). In fixed trusts, income is automatically allocated to beneficiaries based on their fixed interests, simplifying but limiting tax planning flexibility.
• Purpose and Use: Discretionary family trusts are typically used for family wealth management, asset protection, and income flexibility, while fixed trusts are better suited for investment structures where predictability and certainty of ownership are critical — for example, in unit trusts or managed funds.

The legal distinction is particularly important when assessing tax liability, creditor exposure, and family law implications. Australian courts, especially under the Family Law Act 1975 (Cth), have repeatedly looked beyond form to determine whether a discretionary trust operates more like a personal financial resource or a genuine fiduciary arrangement.

Taxation under the Income Tax Assessment Acts

A discretionary family trust is a flow-through structure for income tax purposes. It is not taxed as an entity unless income is undistributed by year-end.

• Present Entitlement: Beneficiaries who are made presently entitled to trust income by 30 June are taxed at their own marginal rates.
• Undistributed Income: If no beneficiary is presently entitled, the trustee is assessed under s.99A ITAA 1936 at 45%.
• Capital Gains: Distributed capital gains may attract the 50% CGT discount if both the trust and beneficiary satisfy holding requirements under s.115-25 ITAA 1997.
• Franking Credits: Can be passed to beneficiaries under ATO’s family trust election regime.

Trustees must document resolutions in writing before 30 June each financial year to ensure validity of income allocation.

Asset Protection and Fiduciary Integrity

Legally, a discretionary family trust provides substantial asset protection, as ownership is vested in the trustee, not the beneficiaries.
However, equity will not protect sham trusts or those used to defeat creditors. In ASIC v Rich [2009] NSWSC 1229, the Court reaffirmed that improper mixing of personal and trust assets may justify piercing the trust’s protection.

To preserve integrity:

• Maintain separate bank accounts and records;
• Observe fiduciary impartiality;
• Avoid self-dealing or related-party misuse; and
• Conduct annual legal audits of trust compliance.

These safeguards align with equitable maxims: “Equity acts in personam” and “He who seeks equity must do equity.”

Governance and Trustee Duties

Trustees of a discretionary family trust bear overlapping fiduciary and statutory duties, including:

• Fiduciary Duty: To act bona fide, for proper purpose, and in accordance with the trust deed.
• Duty of Care and Skill: As established in Speight v Gaunt (1883) 9 App Cas 1, trustees must act with the diligence of a prudent person of business.
• Duty to Account: Maintain and provide records upon request.
• Statutory Obligations: Where a corporate trustee is used, directors must comply with ss.180–184 Corporations Act 2001 (Cth).

Failure to observe these duties can result in equitable compensation, removal, or disqualification from managing trusts.

Cost and Legal Compliance Considerations

Establishing a discretionary family trust requires modest initial expenditure relative to its benefits:

• Drafting trust deed: AUD 1,200–2,500
• Corporate trustee incorporation: ~AUD 576 ASIC fee
• Annual trust return and accounting: ~AUD 1,000–2,000

More significant than cost, however, is ongoing compliance. Trustees must adhere strictly to ATO rulings, maintain contemporaneous documentation, and review deed terms after legislative amendments to prevent resettlement risk.

Estate Planning and Intergenerational Control

In estate law, discretionary family trusts offer unique continuity and control advantages.
Unlike wills, they bypass probate, maintain confidentiality, and allow the appointor or trustee succession to preserve wealth across generations.

They are also integral to multi-layered legal structures where:

• A family trust holds shares in an operating company; or
• A superannuation fund coexists with a testamentary trust.

This architecture creates a multi-generational estate ecosystem, balancing asset protection, tax efficiency, and governance stability.

FAQs: Discretionary Family Trusts Explained

Before establishing or administering a trust, clients often seek clarity on recurring legal questions.

What is a discretionary family trust and how does it work?

It is a fiduciary relationship where a trustee controls assets for the benefit of specified family members. The trustee’s discretion allows for flexible income and capital distribution, subject to equitable obligations and statutory oversight.

Who are the key parties involved?

The settlor creates the trust; the trustee manages it; beneficiaries receive distributions; and the appointor retains ultimate control. This framework balances legal authority with accountability.

What are the tax implications of a discretionary family trust?

Income is taxed in beneficiaries’ hands when they are presently entitled. Undistributed income triggers trustee liability at 45% under s.99A. Proper resolutions are critical for compliance.

Is a discretionary trust suitable for asset protection?

Yes—provided it is genuinely established and not a sham. Trust assets remain insulated from personal liabilities, except where courts find misuse or equitable fraud.

What assets can be held in a discretionary family trust?

Real property, investments, intellectual property, or business interests may be held, provided they are clearly recorded as trust assets and managed under the deed’s terms.

What are the trustee’s legal duties?

Trustees must comply with the deed, act in good faith, maintain impartiality, and avoid conflicts. Breaches expose them to personal liability and equitable remedies.

How much does it cost to set up and maintain?

Legal setup generally costs between $1,200–$2,500, with annual compliance adding modest ongoing expenses.

How do discretionary trusts assist in estate planning?

They enable long-term asset retention and smooth succession without probate. Appointor and trustee succession mechanisms preserve control and prevent fragmentation of wealth.

Legal Conclusion

A discretionary family trust is a refined instrument of Australian private law—an intersection of equity, fiduciary duty, and tax governance. When established correctly, it safeguards family assets, supports lawful tax planning, and ensures generational control.

For expert assistance in structuring or reviewing a family trust under Australian law, connect with LegalFinda, Australia’s trusted legal directory linking individuals and businesses with verified trust and estate practitioners.