Have You Planned The Succession for Your Family Trust?
Assets owned in your family trust or investment trust are not governed by your Will. So how to you make sure that those assets pass to the right people, and your family benefits from your investments in a way you want them to? You need to consider the succession of the powers in your family trust carefully.
“Standard” trust deeds are standardised by whomever they are bought off, they are not a standard document throughout a particular State or Australia generally. So it is not like a standardised Contract of Sale of Real Estate, which are legislated to contain certain general conditions. Trust deeds have no such regulation. By telling your solicitor or accountant that your trust is “just comprised of the standard document” doesn’t mean anything. Each trust deed must be examined, because they are not really standard at all.
The important things that are not standard, and which need to be checked for your specific case when you are planning your succession are:
- who the trustee of your trust is;
- who the appointor of your trust is, and whether the trust deed allows the appointer to appoint a new person in their place or whether there’s some other mechanism for replacement;
- whether there is a guardian in your trust – not all trusts have a guardian (in face not all trusts have an appointor either) – but if there is a guardian the trust deed needs to be checked to see is the guardian can appoint a new guardian or whether they’re replaced some other way;
- powers of the trustee to amend the trust deed to add or change beneficiaries; and
- special mechanisms of the trust to keep the trustee independent ,which allows for more complete asset protection.
Normally trust property will not be subject to the direct operation of a power of attorney or a Will. Hence, property owned by the trust is not yours to bequeath to whom you want.
This is why it is important to know what roles you have in the trust, and what roles you can pass onto someone who can be trusted to operate the trust as you want. As part of this process, you can leave a statement of wishes for your successor, if you want the trust to operate a particular way, and you want income to be paid through the trust to a particular person.
An example of a trust gone wrong
Nicole runs her hair dressing business, and owns a couple of investment properties, in her family trust. The trust deed states that when she dies, Frank – her now ex-husband – becomes the new appointer of the trust.
Nicole sees a lawyer to make her will and tells her lawyer that she owns all of her assets in her sole name. She doesn’t understand how the trust operates, and fails to mention its existence. Nicole makes a Will directing that all her assets pass to her three children equally.
After Nicole’s death from breast cancer a couple of years later, her children learn that virtually all of her assets are held in the family trust. This means that their inheritance under their mother’s Will is negligible. More concerning is the fact that Frank (Nicole’s second ex-husband), is the new appointor, can appoint himself, or a company that he controls, as the new trustee of the trust. The children will be relying on the new trustee exercising its discretion in their favour before they receive a distribution from the trust. But the new trustee is controlled by Frank, and he can choose to pay everything to himself only! This wasn’t Nicole’s original intention.
Other options to deal with the family trust
Other than ensuring control of the crucial roles of trustee and appointor are transferred to certain people, there are other options for your trust:
- have a trigger to automatically wind up the trust (be aware of potential adverse CGT and asset protection consequences);
- making revocable determinations to ensure that certain beneficiaries receive a portion of the trust income and, perhaps, trust capital;
- inserting a guardian clause into the trust deed if your trust doesn’t already have one, so that the pre-approval of the guardian is required before certain distributions can be made;
- amending the terms of the trust deed to add or exclude certain beneficiaries; and
- splitting or cloning the trust.
If you have a family trust and you haven’t thought about the succession of that trust, or you don’t fully understand what roles you have in the trust and how it works, then please arrange for it to be reviewed.