Key issues in estate planning using trusts
A look at two important family trust issues that advisers may come across in establishing or managing the workings of a client’s estate planning using trusts.
Issue #1: Who should be the Appointor of my Family Trust?
When completing an instruction form for arranging a new family trust for a client, it is very likely that the form will ask the question – who do you want to be the “Appointor” of the trust?
It’s a very important question, because typically the Appointor is the person who has the power to “hire and fire” the trustee of the trust. So even though the trustee is the person (or entity) which holds the legal title to all the assets of the trust and is the person who typically has full management and control over the affairs of the trust, ultimately if the Appointor believes that the trustee is not doing their job properly (or for that matter, any other reason) the Appointor has the power to remove that person and replace them with one or more new trustees.
More often than not, the Appointor will also have additional “powers”, such as the ability to veto certain actions by the trustee (who may be required to provide prior notice of certain intended actions to the Appointor). This may extend to important issues such as:
- Amending the trust deed;
- Changing the vesting date (or end date) of the trust; and
- Changing the beneficiaries of the trust.
Given that the Appointor often has the power to block certain actions by the trustee and has the power to remove and replace the trustee, the role is often seen as a protective one to prevent excesses and abuses of power by the trustee. Indeed, the role of Appointor is often described in trust deeds as “the protector” or “the guardian”.
However, the Appointor is also often considered to be the “real power” behind the trust, who is pulling the strings of the puppet that is the trustee. Viewed in this light, the role seems less benevolent.
Rather than being a “guardian angel” to watch over the affairs of the trust, the Appointor is now more often considered to be the ultimate controller of the trust, and even the “prime mover” of the family behind the establishment and ongoing management of the trust.
As a result, in many modern (and it must be said, “cheap and nasty”) family trust deeds available from certain document providers (both lawyers as well as non-lawyers), the beneficiaries of the trust are even defined around and by reference to the Appointor (so that the beneficiaries are literally defined to be the Appointor, the Appointor’s spouse, the Appointor’s children, and so forth).
The so-called “benefit” of this approach is that the document provider typically only needs three names with which to completely populate a template for a family trust deed – the name of the settlor, the name of the trustee, and the name of the Appointor.
But beware! The major problem here is that if you change the Appointor of the trust, you are also changing potentially all of the beneficiaries of the trust – and quite possibly without realising that you have done so until perhaps years later in the middle of a tax audit when it is discovered that all the trust distributions that were made to the various beneficiaries of the trust were in fact made to persons who were no longer trust beneficiaries after the change in Appointor and therefore all those trust distributions were invalid! This may result in dire consequences including but not limited to:
- All the tax returns for the trust and for the incorrect beneficiaries having to be re-done and re-lodged – with possible penalties for late lodgment and interest on unpaid tax attaching;
- Default trust distribution provisions operating and the need for the tax returns for the default beneficiaries having to be re-done and re-lodged – again, with possible penalties for late lodgment and interest on unpaid tax attaching;
- The trustee being in breach of trust in relation to all those incorrect trust distributions and subject to legal claims for loss and damages by the incorrect beneficiaries, by the default beneficiaries, and any other potential beneficiaries of the trust who arguably “missed out”.
So not only do you need to take care in the choice of the Appointor of the trust, but you also need to be aware of all the roles of the Appointor under the relevant trust deed, and what happens if you ever wish to change the Appointor.
Issue #2: How do you “Will” assets held by a Family Trust?
Wealthy clients often hold assets in a family trust.
This may be because of the trust having been set up to help save tax through splitting the income of the trust between family members on lower tax rates than the client, or perhaps the trust was set up in order to shield investment assets from the possibility of exposure to litigious claims against the client due to their profession or business. Often both reasons apply.
In fact, with the proposed caps being sought to be imposed by the Federal Government on the amount that wealthy clients can put into the concessionally taxed superannuation environment, arguably the popularity of family trusts will only increase – particularly where they are established with a separate “bucket company” as a beneficiary so that the tax payable on trust income can be at least limited to the corporate tax rate, which is likely to decrease over the coming years.
From an estate planning perspective, family trusts pose an interesting issue for clients – who typically assume that the assets of the trust are “their” assets. Namely – how does the client pass ownership of assets under their Will where those assets are not actually owned by the client in their personal names but are instead owned by a family trust?
The answer is simple. You don’t.
What you do instead is to focus on passing on the control and benefit of those assets, rather than legal ownership of the assets themselves. That means passing on control of the legal owner of the assets – the family trust.
Usually this can be achieved in one (or more) of three ways:
- Passing on control of the trustee;
- Passing on succession of the role of Appointor; and/or
- Amending the trust deed for the family trust.
As the trustee is the legal owner of the assets of the trust and is the controller of the trust, passing on control of the trustee can effectively pass on control of the family trust and therefore the assets it holds.
Where the trustee of the family trust is a company, passing on control of the trustee may be as simple as gifting the shares in the company. This is something that actually can be accomplished via a Will.
For most family trusts there is a role for someone to be able to appoint and remove the trustee, for example where the trustee has lost capacity. This role is often referred to as the “Appointor”, although it can be referred to by any other name (such as the Parent, the Guardian, the Protector, etc). The trust deed for the family trust will usually specify how this role is passed on to another person if the Appointor dies or loses capacity, and therefore the trust deed must be consulted for the appropriate method of succession. In some cases the Appointor has the right to determine their own successor by written instrument such as a deed or by Will. If so, and if the client is the Appointor, then the client can achieve by Will the passing of “ultimate” control of the trust, by nominating their successor by Will in accordance with the terms of the trust deed.
But ultimately the ability to pass on control of the family trust will depend on the terms of the trust deed, which must be reviewed very carefully. At the end of the day, the ability (or otherwise) to pass on the control of a family trust by any means depends upon the terms of the trust deed, and therefore it will be necessary to have the trust deed reviewed by an appropriately qualified and experienced lawyer.
By Brian Hor, Special Counsel