This is the final instalment in my trusts trilogy. Over the last couple of months we have explored how testamentary trusts and superannuation proceeds trusts integrate with your estate plan. This month, let’s look at the key considerations for your discretionary family trust as part of your overall succession strategy.
It is not uncommon for families to hold wealth in a protective and tax effective discretionary family trust structure. But what people sometimes fail to consider is what happens to the assets in the trust when a key person dies or becomes incapacitated. Subject to the terms of the trust deed, the vesting provisions of the trust, and the succession arrangements put in place, the assets owned by the family trust will continue to be held in that same structure even if something happens to the principal individuals involved.
Let’s take the Sophie & Matthew Cohen Family Trust as an example - a fairly standard discretionary trust structure established to make investments primarily for the benefit of Sophie and Matthew, their 4 school aged children, and a broader class of related general beneficiaries. There is a corporate trustee of which Sophie and Matt are both directors and shareholders, and Sophie and Matt are joint individual appointors (sometimes called a principal, guardian or protector).
Whilst the trustee makes the day to day decisions about the trust in relation to investments and distributions, the appointors’ main role is to ‘hire and fire’ the trustee, and so they are generally considered the ultimate controllers of the trust.
But what if something tragically happens to Sophie and Matt as they are surfing off Coolum Beach in Queensland (which is where I sit as I write this), and Sophie dies and Matt suffers an acquired brain injury? The critical consideration here is, what succession mechanisms are in place for the control of the trust? Control the trust. Control the trust assets. Control distributions of income and capital.
The default succession mechanism for the appointor role often provides that the legal personal representative of the last surviving appointor steps into that position, which will be the executor upon death, or the financial attorney if there is an event of incapacity.
What if your accountant as your trusted adviser is named as the appointor? What if something happens to the accountant? Do you really want his or her spouse as executor controlling your family trust if your accountant dies?
Quite often a deed will allow a successor appointor to be appointed via will or deed of succession.
In Sophie and Matthew’s case, they have ensured their nominated siblings as executors will take over control of the family trust for the future benefit of their children, and they have provided guidance around the trust’s management in their non-binding Memo of Directions that sits alongside their Wills.
They have also considered the treatment of any unpaid present entitlements in the trust (which will form part of their personal estates), whether any variations to the trust deed or the vesting date are advisable, and whether forward income or capital resolutions are appropriate.
The mantra is ‘Read the deed! Read the deed! Read the deed!’, and ensure the desired succession of control of your family trust aligns with your overall estate plan.
*A Matter of Trust was the second hit single on Billy Joel’s 1986 album The Bridge