Family Trusts and chain of succession

Hands up who is in business or has investments and use a Family Trust! That is a great many of us and there is a huge amount of wealth tied up in trust structures in Australia.

Now hands up who can explain how a trust works! In a large number of cases when we are discussing succession issues with clients there is a limited knowledge of the mechanics of trusts. The main problem is the misunderstanding by clients that they do not “own” the assets held in their family trust. All they have is a right to be considered by the trustee for a distribution of capital or income, if they are within the “class” of named beneficiaries. They might also be the “appointor” or “controller” of the trust. This is sometimes called the “guardian”. If so named in the document the person has the “power to appoint” the trustee and the power to change the trust terms.

Very often families accumulate wealth in real estate together in a family trust. If one of them dies there is not a separate identifiable part of the trust property that can be handed to their children as part of their estate. This can create a lot of problems in families where they have all interested their time and hard earned money in a collective enterprise “owned” by the trustee of the trust. What can you do?

It is important to check the financial statements to see if there are “loans” by any one family member to the trust or if the payments were recorded as a gift. Loans are able to be demanded back and repaid, including to an estate. This might also be created by amounts recorded as “distributed income” for tax purposes but the cash was accumulated and retained by the trustee. This is called an “unpaid present entitlement”.

The controller of a trust or person having a loan due to them can “forgive” the amount of the loan in their Will and it will stay in the trust without tax consequences. Unfortunately you have to die first!

The problem is dealing with a number of people that have different interests and a desire to separate that part of trust assets between them. Very often this can only be done by selling the trust property and distributing the cash. The other solution might be to transfer trust property by way of distribution but most often this will incur stamp duty and possibly capital gains tax.

An alternative solution might be to ensure a corporate trustee with all relevant family members as Directors and shareholders. A corporate “appointor” might also be inserted into the Deed by variation. The Directors could be the key family members and different classes of shares could be issued to them. In this way, without a change to the trust or a transfer of any property, recognition of the key family members could be achieved.

This also allows each key person to leave the shares in their Will and the company constitution could be changed to ensure that those shareholders then have a right to be appointed as a Director. The family group can hold their investments and perhaps the legacy that has been created, which in turn can continue to provide a source of income for a wider family group. This is a very technical process and one which you should seek specific advice every time. Remember all trust deeds are different and must be read carefully in the facts of each case. cheers