Discretionary Family Trusts (also known as inter vivos trusts) are a popular business and investment structure in which the trustee holds assets in trust for a group of beneficiaries, usually family members.
Correctly structured Discretionary Family Trusts can assist with asset protection, the tax effective distribution of income, and the transfer of control of assets.
If you are a trustee or a beneficiary of a Discretionary Family Trust, the trust assets do not form part of your estate and you cannot transfer the assets to beneficiaries utilizing your Will. Therefore if you hold assets as a Trustee or have appointment powers in a Family Discretionary Trust, you must consider about what will happen to the trust assets in the event of your death.
Depending on the terms of the trust deed, the Discretionary Family trust may continue well beyond your death.
It is therefore important that you understand how a Family Discretionary Trust operates and the roles within the trust, as this will affect how you plan your estate.
What follows is an overview of items to consider in respect to structuring your Discretionary Family Trust in the event of your demise in the event of death or incapacity.
In the first instance review the Trust Deed of the Family Discretionary Trust. The trust deed should be viewed in its entirety. Following establishment of the Family Discretionary Trust, the trust deed may have been amended at various items. Ensure that you read the most current deed together with all amendments.
Control of the Trust
Secondly consider how your Discretionary Family Trust is controlled.
There are usually two levels of control:
- The trustee, who administers the trust and exercises discretion year by year as to whom income/capital is paid to; and
- The Appointer/Principal, who has power to appoint and dismiss the trustee,
Both levels of control must be considered and effectively structured to enable your intended beneficiaries to benefit from the capital and income of the trust in the event of your death.
The trustee is responsible for the day-to-day management and administration of the Family Discretionary Trust. The trustee’s powers are outlined in the trust deed. The trustee’s duties usually include the allocation of the income and capital of the trust, the administration of the trust’s investments, the maintenance of financial records and the decision of when the trust is wound up. The trustee may currently be you (either solely or jointly with others) or a company in which you hold shares and are a director.
The trust deed should outline how a trustee is to be replaced. Hence the trust deed should be reviewed. If you are the sole trustee of your Discretionary Family Trust, on your death your executor may become the trustee. If the Family Discretionary Trust has joint trustees who are individuals, on the death of one trustee the surviving trustee will usually continue as the trustee of the Family Discretionary Trust. On the death of the last trustee, the executor of the estate of that trustee may become the trustee of the Family Discretionary Trust.
Therefore if you are a personal trustee:
- Review the Trust Deed and consider who is to be the trustee on your death or incapacity.
- The Trust Deed may outline how the Trustee is to be appointed. If this meets with your requirements then no further may be required.
- If not, a Variation of the Trust Deed may be required in line with your particular circumstances.
If your Family Discretionary Trust has a corporate trustee:
- Consider who the shareholders are and who will receive the shares under your Will. Furthermore consider the corporate constitution of the Trustee and whether there are limitations on how shares can be transferred.
- Consider if the corporate constitution requires more than one shareholder. This may be unlikely if the company has been recently incorporated.
- Review the constitution in respect to the appointment of directors. Generally the power to appoint and dismiss directors is with the shareholders.
- Consider if there may be unintended consequences with an undesired single controlling director. While the power to appoint and dismiss a director maybe with the shareholders this may not prevent a single director acting before a replacement/additional director is appointed by your estate. A possible solution may be to appoint an additional director(s) before unintended consequence arises due to your demise.
Depending on the terms of the trust deed, it is usually the appointer who has ultimate control of the Family Discretionary Trust. The appointer is authorised by the trust deed to appoint and remove the trustee. The first appointer is generally the person who initiated the establishment of the trust.
Often, the trust deed will provide the appointer with the power to nominate a new appointer in their Will. If you are the appointer, your Will may provide that the position of appointer will be transferred:
- equally to those of your beneficiaries whom you wish to have ultimate control of the Family Discretionary Trust, or
- An independent person who may not be a beneficiary of the Family Discretionary Trust but who you consider will act in accordance with your particular circumstances.
Control at Appointer/Principal level is even more critical. Therefore consider the following:
- Review the Trust Deed in respect to the Appointment powers.
- This power is often a personal power and so without provision in the trust deed it will not pass to the executors of the deceased appointer.
- If there is provision in the deed to appoint the next appointer often the appointer will need, via the procedures outlined in the trust deed to appoint a successor.
Distribution Capital or Income from the Family Discretionary Trust by the Successor Appointer
This issue is too often overlooked.
The beneficiaries of a Family Discretionary Trust are generally a group of persons or entities who may receive distributions from the trust, as specified in the trust deed. There may be one group of beneficiaries who may receive ongoing income distributions (income beneficiaries) and another group to whom the assets will be distributed when the trust is wound up or during the existence of the trust (capital beneficiaries).
Although the assets of a Family Discretionary Trust do not form part of the personal estate of a beneficiary, it is important to consider who may ultimately receive the capital of a trust or control of that trust. For instance, you may want people who are not beneficiaries of the Family Discretionary Trust to receive an equal share as those who are beneficiaries. In that case, when you prepare your Will, consideration should be given to equalising potential discrepancies in the overall distribution of the assets of your Family Discretionary Trust and the rest of your estate. When you have multiple beneficiaries and they are not all appointed as “controllers”, the potential exists for the controller to divert the wealth for their own personal benefit at the expense of other beneficiaries.
At the very least, you consider expressing your wishes in a memorandum.
The vesting date is the date on which the trust must be wound up. It may be a date established in the trust deed or chosen at the discretion of the trustee.
If the Family Discretionary Trust was established for the benefit of a particular family member, the Family Discretionary Trust may not need to be continued after their death. The trustee of the Family Discretionary trust can then decide to wind up the trust and distribute the assets to the capital beneficiaries.
During the existence of the Family Discretionary Trust, you may have deposited personal funds into the Family Discretionary Trust and thus creating a loan from you to the Family Discretionary Trust. Loans may also exist between the Family Discretionary Trust and its beneficiaries if income has been allocated to the beneficiaries but has not been paid from the Family Discretionary Trust. These are usually recorded as beneficiary loan accounts and are liabilities of the Family Discretionary Trust.
Although the assets owned by the Family Discretionary Trust do not form part of your estate, loans from you to the Family Discretionary Trust are an asset of your estate that can be called upon by the executor upon your death. When preparing your Will, care must be taken to ensure that on your death there does not create a sudden need for the Family Discretionary Trust to sell assets in order to repay a loan to your estate.
If you have withdrawn funds from your Family Discretionary Trust as a loan, this will generally be a liability of your estate and will need to be repaid to the trust following your death. The impact of this liability on your estate also needs to be carefully considered as part of the estate planning process.
Assets owned by a trustee on trust for a Discretionary Family Trust, are held for the benefit of all the potential beneficiaries and thus will not transfer on death to beneficiaries nominated in your Will. The importance of reviewing and considering how assets held within your Discretionary Family Trust will transfer on death will be dependent on how your Discretionary Family Trust is controlled and structured to meet your changing circumstances in the event of your demise.
Will & Estate Planning Lawyers Sydney at Pavuk Legal can assist you on many legal aspects in relation to your estate planning and asset protection requirements including review and amendment of your existing trust deed, update to your will and preparation of testamentary trusts.
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