Trusts, estate planning and disputes – tips and traps for dealing with trusts as part of an estate plan

Flexibility is an inherent feature of discretionary trusts. However, this makes it difficult to provide certainty in how the assets of the trust will be dealt with after death. Generally, a person will want their trust to continue after their death for the benefit of the next generation rather than the assets sold off or distributed on death, particularly where they have built up a significant family business in a trust structure.

Many are not aware that the assets in their trusts cannot be transferred under their Will.

Control is key

The challenge for advisers is to ensure that the estate plan effectively deals with transferring control of the trust in accordance with the clients’ wishes. Depending on the client’s strategy and the level of risk of an estate dispute, sometimes it will be preferable to pass control outside the terms of the Will.

To transfer the control of a trust it is necessary to look at both:

• the succession of the trustee (and shares in a corporate trustee); and
• the power to remove and appoint trustees (commonly held by a person referred to as an appointor, principal or guardian).

Opportunities to get it right

Regardless of whether control is being passed through the Will or a variation to the trust deed, it is absolutely necessary to read and understand:

• the deed establishing the trust and any varying deeds;
• the constitution for a corporate trustee, and voting rights attached to the shares; and
• the Will – how the shares in any corporate trustee are dealt with as well as any power of appointment.

Generally, the person who becomes the trustee or director of a corporate trustee will have a discretion as to how the assets and income of the trust are distributed. In many cases, ensuring that the shares in the corporate trustee are transferred to the designated controllers will not be enough to ensure that those persons will take control of the trust. It will also usually require a change to the constitution.

Most (but not all) trust deeds stipulate that a designated person (commonly referred to as an appointor, principal or guardian) has the power to remove a trustee and appoint a replacement. It is common for trust deeds to include default terms passing this power to the executor of the last surviving appointor. But is this fall-back position in line with what that person intends?

The following are some tips and considerations when passing control of trusts:

1. One option is to give a statement of wishes and directions to those who have been nominated to control the trusts. This strategy may not achieve the intended outcome in all situations as it relies upon the replacement controllers willingly upholding the directions of their predecessor.
2. Alternatively, it is possible to create fixed entitlements for certain designated beneficiaries. Done properly, these changes will not trigger any adverse tax or duty implications; however, care must be taken when implementing a strategy like this.
3. There are also strategies to separate control and value between beneficiaries. For example, leaving some children in control of a family business operating through a trust (because they have been working in it) but leave some of the value in the business to other children.
4. Consideration should be given to whether to include provisions to reduce the risk of the assets of a family trust being dealt with as part of a matrimonial property pool.
5. One aspect that seems to be commonly overlooked is that most discretionary trust deeds allow a wide flexibility to amend the deed. Unless these powers of amendment are restricted, any plans put in place before death may be unwound later.

When it goes wrong

Usually, the cost of proactively dealing with these issues now as part of an estate plan will be insignificant compared to the costs later incurred by the next generation and the time, effort and stress involved with any dispute.

If you or one of your clients has a trust as part of their investment or business structure, the ongoing control of the trust must be considered as part of an estate plan.

To discuss the options to deal with a trust or any other estate planning documents, please contact a member of our estate planning team.

Hayley Mitchell and Steven Jell will be presenting the seminar Trusts and estate planning and disputes at the Annual Adviser Conference, to be held on 25 and 26 March 2021 live at Sofitel Brisbane Central and virtually through our event platform. Register here.