Family Trusts: Background Information

When you arrange for your Lawyer or Accountant to prepare a Family Discretionary Trust for your family, you need to have a full understanding of some of the key roles.  These roles are explained on our website.  Usually a Family Trust is created by a husband and wife – who we can call the founders of the Trust (not a widely used term).

The question of who has control of the Trust is absolutely crucial – and as we explain below, the answer requires a little consideration.

The Trustee has the day to day responsibility for the management of the Trust.  The Trustee decides what assets will be bought or sold by the Trust.  The Trustee’s name will appear on all ownership documents – recording the Trustee as the legal owner of the trust assets.  The Trustee also has the power to replace the Appointor.

The Appointor has the power to remove the Trustee and appoint a new Trustee in their place.  The Appointor doesn’t have any other responsibilities.

Usually the husband and wife – or companies controlled by them – will be the Trustee and the Appointor.  Thus, the Trustee can replace the Appointor, and the Appointor can replace the Trustee. There’s no problem with this whilst the Appointor and Trustee are one and the same or alter-egos of each other.  (Of course, you have to check the Trust Deed on every single occasion to verify the existence of these powers, and how these powers are to be exercised!).

Major problems can arise when the husband and wife fail to ensure correct estate planning by not ensuring that the right people are in control of the Trust when one of the founders passes away.

What can go wrong: Actual Case studies?

UNHAPPY STORY

A husband and wife had 4 kids.  One of their sons was “the smart one”. The husband and wife created a Family Trust, and had established a company to act as the Trustee. The wife was the Appointor of the Trust.  The father and the smart one were the Shareholders and Directors of the corporate Trustee. The father died, which left the son in charge of the corporate Trustee. The husband, wife and the 4 children were all beneficiaries.

The wife received legal advice that she should use her power as the Appointor to replace the company as the Trustee of the Trust.   The wife did not follow the advice as she trusted her son.  The son, as the controller of the Trustee, distributed all of the assets of the Trust to himself.  Re-read that last sentence before continuing!  We are talking about decades of asset accumulation by parents for the benefit of their entire family.

It’s not easy to accept that your lawyer may have a better understanding of what your child is truly capable of!!  The money is one thing but to think that they raised a child to act in such a way is on a different level!

HAPPIER STORY

A husband and wife were the directors and shareholders of the corporate trustee of their family trust. Their son was the Appointor of the Trust. After the husband died, the wife sought some legal advice. The wife, as the controlling director of the Trustee company, removed the son as the Appointor of the Trust. This change wasn’t communicated to the son – as the wife wanted to see what action the son might take. (We suspect the wife was hoping to see for herself that her son was a decent human being!)

Several months later, the son sent a formal notice to the wife (his mother) notifying her that she (her company) had been removed as the Trustee of the Trust and therefore she no longer had any control over the assets.  At this time, the wife notified her son that he had previously been removed as the Appointor of the Trust and that as a consequence, his actions had no legal effect.

COMMENTS

These stories are both incredibly sad.  They are devastating for the remaining family members.  Parents had established Family Trusts for the benefit of their entire families.  The parents just didn’t die quickly enough for one of the children – but even more than that, these 2 sons did not want to share with their siblings!

So what do you do now?

Don’t appoint any of your children as the Appointor or Trustee of any Trust, either solely or jointly with a parent

The people with control should be limited to the founders – the husband and the wife.  When one passes, the surviving spouse can continue to receive advice from their Lawyer and Accountant.

It may be appropriate for the Trust Deed to be amended to specify that the Lawyer and /or Accountant,  or some other independent person who is not a beneficiary of the Trust, are appointed to the roles of Appointor and Trustee, following the passing of both founders, for the purpose of distributing the trust assets to the beneficiaries.

Consider varying the Trust Deed by adding a power which enables the Trustee to make a revocable resolution

An example of a revocable resolution could be:  The assets of the Trust are to be distributed equally to the children of the founders.  This resolution becomes irrevocable upon the death of the surviving trustee.  There is a simple strategy which can be implemented to establish that the resolution wasn’t revoked before death.

Careful with the shareholdings of any corporate Trustee

Be careful leaving your shares in the corporate trustee to your children.  As shareholders, they can vote to nominate themselves as Directors of the company, thereby taking control on the Trustee company and therefore the Trust.  The issue may be addressed with the voting rights.

Company Constitution

The company constitution will need to be carefully examined – both in relation to the rights of shareholders, but also the ability to appoint Lawyers, Accountant,  or other independent person who are not shareholders of the company.

Benefit of not granting roles to your children

By limiting your children to the role of beneficiaries of the Trust, where they are involved in any litigation – whether in the Family Law Courts, Supreme or District Courts, or Bankruptcy Court – the assets of the Trust cannot be considered to be an asset of the child, and should therefore not be able to be attacked. This will protect your child’s inheritance to ensure they can enjoy the benefits of the Trust when it is legally and financially safe to do so.

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