More pages in this section
The Second Generation: Family Trusts and Succession Planning
A comprehensive estate plan entails having more than just a Will in place, particularly when there is an intention for the benefit of a trust to be passed down to the next generation. When a person holds assets in a trust, those assets will not form a part of their estate and therefore cannot be gifted under their Will, instead what they can do is plan for the transfer of control over the trust in the event of their death and/or loss of capacity.
Key Positions to Consider:
| Trustee: | A trustee manages the day-to-day running of a trust which could include managing investments and making distributions. For circumstances where there is a corporate trustee, it is important to ensure that the required steps have been put in place to ensure control of the corporate trustee company will be passed along to the appropriate person/people. |
| Appointor: | The appointor(s) will usually have the power to remove the trustee from office and appoint new trustee(s), therefore the appointor usually has ultimate control over the trust. |
| Guardian: | If there is a guardian appointed, the trust deed may specify that the guardian’s consent is required before the trustee can make certain decisions (such as the decision to amend the trust deed or make distributions). |
Potential Issues
If the ultimate intention is for multiple people to benefit from a trust once it is passed to the next generation, an improperly thought-out plan for the transfer of control could result in devastating consequences. Examples of potential issues that could arise include the following:
- Giving control to one person carries an increased risk of unethical behaviour – e.g. a sole appointor (who is also a beneficiary) could elect to appoint themselves (or an entity they control) as the sole trustee before proceeding to distribute income and capital to themselves at the exclusion of all other beneficiaries.
- Issues that can occur when control is passed to multiple people can include:
- Deadlock situations where decisions cannot be made (often trust deeds do not have mechanisms in place to deal with these types of disputes).
- A situation could occur where one person is outvoted, and the other people proceed to make decisions that negatively impact the outvoted person (e.g. distributing capital and income against the outvoted person’s interests)
Mechanisms can be put into place during the first generation’s lifetime to ensure that potential issues are prevented from being able to occur when control of the trust is passed to the second generation. Examples of potential mechanisms include (but are not limited to) the following:
- Ensuring each primary beneficiary is given equal control.
- Appointing an independent third party into an appointor and/or guardian role.
- Amending the terms of the trust deed to:
- require decisions to be made unanimously.
- include dispute resolution mechanisms.
- require consent to be obtained before distributions are made.
Certain measures that may work for one trust might not be effective for another, there is no ‘one size fits all’ approach when it comes to trusts and succession planning. Independent legal and financial advice should be sought to ensure that the chosen plan to transfer control of a trust to the second generation has been developed in a way that can facilitate the wishes of the first generation while also taking into consideration the specific terms of the trust and the relevant goals and circumstances of all relevant parties.
We can assist you
If you require advice in relation to the succession plan for your trust, please do not hesitate to contact one of our commercial solicitors on (07) 4963 2000 or via the link below.