Succession Planning for the Family Trust - Common Approaches
This article was originally published by the Retirement and Estate Planning Bulletin.
The previous article in this series summarised some of the key factors to consider when starting to plan for the succession of your trust.
One of the key aspects when implementing a succession plan for a trust is to look to the end game....what is the future of this trust going to be after the death of the matriarch or patriarch (or both) who currently control the trust….who controls it, who benefits from it and what does it do? Understanding the detailed nature of the trust will assist in reaching this conclusion.
The future objectives for any particular trust will, by necessity, require consideration of a number of factors including:
(a) the intended future activities of the trust;
(b) the identity of the person or group of persons who will be able to make decisions concerning the conduct of the trust;
(c) the identity of the class of people and entities who will benefit from the trust;
(d) the way in which the intended beneficiaries will benefit, including when they will benefit and the extent to which they can benefit.
The current structure of the trust may not necessarily be consistent with the achieving of these objectives and, indeed, could cause tension in family relationships and possibly lead to significant family disputes that are time consuming and costly to resolve.
In very simple terms the following common options are implemented in succession planning for trusts.
1. Terminate the trust in the event of the death of a nominated person.
This option sounds simple and could avoid potential family disputes in the future. However, depending on the nature of the assets in the trust at the time of termination, terminating the trust can be a complex exercise and can potentially give rise to significant tax and stamp duty implications.
Also, who gets the assets? That depends on the terms of the trust deed. Clearly it is critical to understand what the clauses in the trust deed say about the distribution of the trust assets in the event of termination. Will these clauses work properly or are they likely to cause dispute? Do these clauses accurately reflect your intention for the distribution of your family assets or should they be amended to more accurately reflect your intentions? Should the assets of the trust be distributed to the deceased estate of the person whose death triggered the termination so that they can be dealt in accordance with their Will....or is that problematic if there is a risk of a challenge being made against that estate?
2. Maintain the trust in its current format and on its current terms.
By adopting this option the matriarch or patriarch controlling the trust has reached a conclusion that the terms of the trust are satisfactory for the next generation of controllers and the activities of the trust do not expose the next generation of controllers to problems that they cannot adequately deal with.
What is critical is to make sure that the right person, or the right group of people, are holding the appropriate control offices in the trust at the right time. The office of trustee needs to be considered as does the office of appointor (being the person who has the power to remove the trustee and appoint a new trustee). Remember to check the trust deed to see if there are any other control offices that exist in your trust.
Understanding the mechanical operation of the clauses in the trust deed that deal with the passing on of control of the trust is critical in order to ensure that objectives are achieved, and no unintended adverse consequences arise.
3. Maintain the trust but change the terms by which the trust operates.
This is a very common option that is adopted in dealing with succession planning for many trusts. By adopting this option the matriarch or patriarch controlling the trust has reached a conclusion that, while the trust might be operating perfectly well while they are alive, they can foresee problems with the operation of the trust into the next generation. The problems that can potentially arise are many and varied and do depend on the nature of the relationships within the family and also the nature of the trust in question. Similarly the solutions can be many and varied.
In essence, it is common to deal with any or all of the following specific structural aspects of the trust when trying to alleviate (or minimise) the risk of problems arising into the next generation.
(a) Control of the various offices. This is absolutely critical and is worthy of a separate article in its own right. In short though, understand the various control offices that currently exist in the trust and how they operate, consider whether any additional controls need to be built in, consider who should control the trust in the future (ie the individuals involved in the decision making) and what voting rights those individuals should have.
(b) Beneficiaries. Who is included in the class of beneficiaries of the trust and will this be appropriate into the future? What are the current rules by which the beneficiaries can benefit from the trust? Will these rules work fairly and sensibly after your death? Are there any restrictions on when and how the beneficiaries can benefit from the trust? If not, should there be?
(c) Investment Powers. If the investment powers are currently very broad, should they be restricted in any way into the future so as to assist in minimising the perceived investment risk? This issue might extend to consideration of gearing ratios, portfolio mix of asset classes and the like.
Interaction with your Will
Finally, it is essential to consider the various connections that your trust has to your Will.
While the assets in the trust will not, prima facie, be included in your personal estate for distribution in accordance with the terms of your Will, that is only part of the story. Many connections between the Will and the trust do exist most importantly in terms of the mechanisms under the trust deed by which control of the trust is passed and the impact that beneficiary loan accounts can have in shifting wealth from the trust to the deceased estate. Also, a topic worthy of a separate article.
While complexity does exist in dealing with succession planning for trusts and careful planning must be undertaken to get it right, there are common issues that do regularly arise for many families with many trusts and those issues do have common solutions. Tailoring the solutions to meet the family objectives is critical to the succession planning.
Authors: Belinda Cao and Andrew Frankland
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