In this paper regarding succession plan discretionary trusts, I use the following terms interchangeably – “Family” / “Discretionary” Trust.
Discretionary Trust assets do not form part of your Estate
Assets owned by a trustee on trust for a discretionary trust, are held for the benefit of all the potential beneficiaries.
Discretionary Trusts are usually expressed to have a life of 80 years and so they will often survive the person who originally arranged to set them up.
Even if you are the personal trustee of your family trust, the trust will usually continue to have life after your death. The assets are not “your” personally owned assets that are part of your estate to be gifted via your Will.
Control of the trust
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 Appointor/Principal, who has power to hire and fire the trustee.
Ensuring that control moves to those you intend
Both levels of control must be considered and effectively passed on to your chosen person(s) otherwise the wealth in the trust may end up with those you do not intend.
Control at trustee level
If you are a personal trustee:
- We will need to consider what the Trust Deed says about:
- Change of trustee; and
- Death or incapacity of a trustee.
- It may be that the Trust Deed has contemplated these situations and no action need be taken.
- If not, a Variation of Trust will probably be required.
If your trust has a corporate trustee (e.g. a Pty Ltd company):
- Who are the shareholders? Who will these shares pass to under your Will? Does the corporate trustee constitution have any limitations on how shares can be transferred?
- Does the constitution require more than one shareholder? This is unlikely if the company has been fairly recently formed. If yes, we will take care that not all shares are left in your will to a single person or amend the constitution.
- What does the constitution say about appointment of directors? Generally the power to hire and fire directors rests with the shareholders.
- Will there be an undesired single controlling director before the estate can act? While the power to hire and fire may be with the shareholders this may not prevent a single director acting before a replacement/additional director is appointed by your estate. A solution may be to appoint an additional director(s) now.
Clearly, these issues need our advice.
Control at Appointor/Principal level
Assessing the succession of control at this level is even more critical.
Here is our usual approach:
- Check what the Trust Deed says about this.
- This power is often a personal power and so without express provision in the Trust Deed it will not pass to the executors of the deceased Appointor. Is there provision in the Deed for the next Appointor?
- Often the Appointor will need, via Deed (made now as part of their Estate Plan), to appoint their successor. After death, it is obliviously, too late.
It may be necessary to amend the Trust Deed to provide for a more robust succession mechanism.
Who does the new controller give the wealth to?
This question is often overlooked by Will makers.
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 would want to prepare a Desired Beneficiaries Expression of Wish.