The second generation: trusts and succession planning

Discretionary trusts are a common vehicle to move assets through generations.

Assets held in any trust require particular care when estate planning, as they do not automatically form part of your estate on your death. The biggest challenge clients face is realising that assets in the trust are not theirs to dispose of, and, subject to any perpetuity period, the trust is likely to continue after their death.

The key people contained in any trust are usually a trustee and an appointor, and it is these people who ultimately control the trust. On your death, instead of distributing the assets of the trust, you will need to pass the control of the trust to someone, and this requires careful planning to ensure equality and to avoid disputes.

The starting point is to read the Trust Deed as this will often deal with succession of the controlling roles.

Role of Trustee:

The trustee is responsible for managing the day-to-day functions of the trust such as income/capital distributions and requests from beneficiaries.

The trustee can be an individual, although it is common for corporate trustees (meaning a company) to be appointed as the trust does not need to go through a reappointment every time someone wants to retire or dies.

To pass control of a corporate trustee requires you to review the company constitution to confirm whether it allows you to achieve your succession objectives. If it does not, you may need to amend the company constitution so that it reflects your current needs. Once it does, you will then need to decide who will inherit any shares you hold in the company. This will then allow that person/s to become a shareholder which in turn allows them to nominate a director who will make decisions as the trustee of the trust.

To pass control of an individual trustee, review the Trust Deed as this often sets out the mechanism for succession.

Role of Appointor:

The appointor is often considered the most important role within a trust because they hold all the power. They can remove trustees and appoint new trustees, which means it is a high-risk role open to abuse and dispute.

It is common for the appointor to be an individual and the Trust Deed will often provide for the mechanism for succession. It is likely that the Trust Deed allows for the current appointor to nominate their replacement in their own Will, with the default often being that if no appointor is nominated then it falls to the executor of the estate.

A common issue that arises from failing to nominate a replacement appointor is that in situations where parents have nominated their children as the executors and trustees of their estate, but did not want them controlling the trust, it could fall back to the children by default.  

Should you wish to discuss your current situation with one of our Solicitors, please contact us on 8525 2700 or click here to request an appointment with one of our experienced Wills and Estates team.

Article written by Rebecca Exley
Photo by Bernard Hermant on Unsplash