Succession of family trusts
So you have been running your business or your property investment portfolio in your family trust. But you’re now wanting to retire, or at least know that if you take a step back, that the whole thing won’t collapse. You’re at a crossroads, and you need a succession plan.
Make sure you see a solicitor about your succession plan, which is not just a Will, but also looks at the handover of the control of a family entity, like a trust.
Your family trust has probably worked very well whilst you are in control. But that’s the very reason it has worked well – your control. Once you relinquish that control, either voluntarily or through illness or death, you need to be certain that it will keep working well. Your main focus should be on minimising the scope for disputes in the next generation.
Your family trust will typically be characterised by broad discretionary powers held by the trustee, and those powers and discretions will involve a high level of flexibility. All these powers are subject to your trust deed. The key roles in the trust deed are generally the trustee, with the day-to-day control, and the appointor who controls who the trustee is.
If you have a trustee company, it is generally a shelf company with a standard constitution that will need to be reviewed to take into consideration a change of shareholders and directors, and how they will be able to make decisions and ultimately control and manage the trust. If your standard trustee company has any of the following features, they will need to be addressed for the next generation:
- not being able to have telephone meetings of directors
- only directors having a vote on major decisions, rather than shareholders
- holding a share does not give a power to appoint a director
- directors can be removed by a majority shareholder
- on jointly held shares, only the first named shareholder gets a vote
- chairman of a meeting has a casting vote
- allowing transmission of shares on death without restriction
The appointor is a key role in the trust, and may or may not be appropriate for the next generation. Who is appropriate to have the power to control the trustee? Can that role be a joint role? If so, do decisions have to be unanimous or just be majority vote? Or could a new company be the appointor? If so, who are the directors and shareholders of that new company going to be?
Another option may to have a guardian of your trust, if your trust doesn’t already have one. They the guardian will regulate the most important decisions to be made by the trustee. This may help to regulate all the various interests of the next generation. However, you still have the same problem of how a decision is to be made – unanimously, or be majority vote?
The dispute mechanism process in your trust deed needs to be reviewed, keeping in mind the personalities of the next generation.
Another option for your succession plan could be to make a Letter of Wishes to the next generation about how you want things to run, but this is not binding. Or you could have the family enter into a Binding Family Agreement, which would bind everyone to a particular way of treating entitlements under the trust. However, this could just be inviting litigation after you’ve gone, by fettering the trustee’s powers and restricting family entitlements.
There are many things to consider, and this is merely an outline of a few of the most critical aspects to start things about. Most importantly, engage a profession, and don’t leave it until it’s too late.
