Date: 24 September 2026
The minimum tax on discretionary trusts will likely have unintended legal consequences, particularly around estate planning, succession planning and asset protection.
Eroded asset protection
Discretionary trusts are excellent structures for asset protection. Assets held in a discretionary trust (often known as a family trust) are not at risk if any one individual beneficiary of the trust (i.e. a family member) becomes a bankrupt, or has a court claim against them. This is because the assets of the trust are not owned by the beneficiaries, they are owned by the trustee for the beneficiaries. This separation of control and benefit allows a person to go spectacularly bankrupt, and yet still maintain a comfortable lifestyle, if they have access to a family trust. The law allows us to structure our affairs in this way, and benefit from this asset protection, provided the trust is not involved in insolvent business/affairs.
Many family groups have a family trust in amongst the entities, that holds valuable assets, that are safe from the travails of their business.
However, moving forwards, as family trusts become significantly less attractive from a taxation perspective, if families restructure out of a family trust into a company, their asset protection position is substantially more risky. This is because although there is no owner of a trust, there is an ultimate owner of every company, and it is usually the matriarch and patriarch of the family. In this structure, if Mum or Dad become a bankrupt because of a business misadventure, then it is likely that the assets of all of their companies, and potentially the entire family group, are put at risk by this bankruptcy. There is no safe harbour in the storm, when there are no family trusts in the family group.
Losing flexibility
Family trusts have inherent flexibility that companies don’t have. This flexibility allows trusts to distribute income or capital to any family member, including grandchildren, and to companies and other trusts in the family group. There is no equivalent flexibility when a company wishes to distribute – it can only pay dividends to its shareholders. (Note this may mean that moving forwards companies in family groups will have a broader range of shareholders, in separate classes of shares, to allow the company to pay a dividend on different classes of shares to mimic the capability of trust.)
The ability of a trustee to elect to make the family trust an Excluded Election Trust (meaning the minimum 30% tax does not apply) is not a real solution to these problems. That election must nominate named beneficiaries, who have a fixed share of the distributions in future years e.g. 4 children might be named to received 25% each, each year. This however does not allow the trustee to take account of changing circumstances each year – some children will likely have quite different financial needs in different years.
If one of the children entered bankruptcy, then the trustee would still be required to distribute the 25% of the trust income to that child, which would go straight to the trustee in bankruptcy for creditors, or otherwise risk the trust being noncompliant.
There is a limited ability to change the nominated beneficiaries in the event of divorce. But there is no ability to change the nominated beneficiaries if a child dies, if a child is born, or if the children reach an age of familial independence. So we fix the trust once, but as life changes the fixed proportions will become less appropriate.
Succession options impacted
A popular feature of a family trust is that it can be ‘handed over’ to a particular successor by changing the controllers of the trust, generally without any taxation or stamp duty consequences. This allows the prime movers of a family trust to, at the right time during their life, anoint the appropriate successor of the next generation, as part of a succession plan. However, if the trust has been ‘fixed’ with certain percentages of income, then handing it over to a successor is more difficult. Also, if the trust is gone and replaced with a company, then there is no mechanism during life to ‘hand over’ a company without potentially incurring stamp duty and/or taxation costs for the family.
“Fixing” the income shares in a family trust is antithetical to the driving purpose and advantages of a discretionary trust – the discretion is gone. It may be a difficult decision, with many factors to weigh up, before families restructure away from their family trust which has served them well over the years. For many families, the advantages of the asset protection and succession advantages of the family trust structure, may mean the trust is worth retaining even with the minimum 30% tax on income. This will be determined by each family on a case-by-case basis.
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Article written by Cameron Cowley, Special Counsel – RMLS
