So you have a family trust – What happens when you die?

Trusts are a popular vehicle for business and investment of family assets because of the tax and asset protection advantages they offer. However, at the end of your lifetime the succession of your family trust to the second generation can be problematic if this transition has not been carefully planned for.

A key feature of a trust is that the assets are not owned by you personally and therefore cannot be dealt with via your Will. Instead, the assets of the trust are owned by the Trustee who has the discretion to decide who benefits from those assets. The ultimate control of the trust usually lies with the appointor who has the power to remove and appoint the Trustee.

Succession of control

One of the crucial considerations to the succession of your trust is the succession of these positions of control. Whilst your children and family members may be beneficiaries, if the wrong person gains control of the trust there’s a risk they may utilise the trust assets to their own advantage to the exclusion of the persons you intended to benefit.

There are various mechanisms for ensuring the appropriate person takes control of the trust. Depending on the terms of the trust deed, a successor appointor and trustee may already be provided for in the trust deed or can in most cases be nominated by Will or by Deed. If your family trust has a corporate trustee, it’s also important to ensure that the shares in the corporate trustee are directed in your Will to the intended successor.

Reviewing the terms of the trust

Planning ahead for the succession of your family trust should also involve a review of the provisions of the trust deed and other related documents such as the corporate constitution. Particular attention should be paid where control of your trust is passing to multiple successors.

Decision-making and dispute resolution

If multiple persons are appointed to the role of appointor or trustee, it should be considered whether decisions should be made unanimously or by simple or special majority. If a corporate trustee is in control of the trust, the voting mechanisms for directors provided in the corporate constitution will also be important. If only a majority decision is required, there is a risk that a majority of children may gang up and outvote a minority individual or individuals with the consequence of excluding that child or children from benefiting from the trust. If there is a risk of this occurring, it may be necessary to amend the trust deed or constitution to provide for joint decision-making or minority protection mechanisms.

Where it is intended that multiple persons will take control of the trust, this naturally brings with it the possibility of disputes arising. Ensuring that appropriate dispute resolution mechanisms are provided for in the event of deadlock or disagreement can assist with resolving disputes before they proceed to litigation.

Need Help?

Planning the succession of your family trust can be quite complex and there is no one size fits all approach. However, planning ahead for the succession of your family trust and making the necessary amendments to the trust deed and related documents during your lifetime is crucial to minimising disputes and ensuring a smooth transition to the second generation.