As a result of the many advantages a discretionary trust can have,[1] including possible taxation advantages, asset protection and income splitting opportunities, the creation of a discretionary trust has become a prevalent and popular choice for individuals wishing to develop and safeguard wealth for the future generations of their family.
Despite the popularity of discretionary trusts, the reality that a trust will likely survive its creators and controllers is often not properly considered.[2] Accordingly, discretionary trusts which own assets and/or produce income require particular care from a succession planning perspective. In this regard, it is a common misconception that trust assets and/or income will simply form part of the trust’s creator’s or controller’s estate upon death.
However, given that a trust does not die along with its controller(s), the trust does not cease on their death. Therefore, it is essential that appropriate measures and mechanisms are put in place to pass on control of the trust in the event of the controller(s) incapacity or death.
PASSING ON CONTROL OF A DISCRETIONARY TRUST
To effectively pass on control of a discretionary trust to its successors it requires careful consideration based on the individual intentions and family dynamics. When putting in place a succession plan in relation to a trust, the first step is to review the trust deed, and any ancillary documents, such as the company extract – if the trustee is a company.
Further, although it is often believed that the trustee is in control of the trust, there is another position within the trust that often has principal control by being able to remove and appoint the trustee, this person(s) is referred to as the ‘appointer’.[3]
The Appointor
The appointer generally can remove the trustee, so a successor appointor is central to planning for the second generation. In this regard, it is the trust deed which generally provides for the succession of the appointor position which may allow for the current appointor to nominate a successor appointor during their life or through their Will.
The Trustee
When considering how to appoint a successive trustee who is an individual, it is generally the provisions of the trust deed that sets out the process for a successor trustee to be appointed.
When considering how to appoint a successive trustee who is a company trustee, it is important to consider how the shares held in the company will be gifted or transferred as it will be the shareholders who ultimately determine the directors of that company.
NOT HAVING A SUCCESSION PLAN FOR YOUR TRUST
Trusts can be a desirable tool, however, if they are not appropriately addressed as part of your succession plan, it could, in a worst-case scenario, result in the Courts needing to be approached for rectification.
Accordingly, if you would like some specific advice in relation to a succession plan for your trust, please contact us to make an appointment.
[1] Discretionary trusts are also commonly known as ‘discretionary inter vivos trusts’ or a ‘discretionary family trusts’ or bloodline trusts
[2] In Queensland, the ‘lifespan’ of trust can be for up to eighty (80) years from its creation. The lifespan of a trust is referred to as the the ‘perpetuity period’.
[3] Sometimes also referred to as the ‘principal’ or ‘guardian’.
