Cooper Grace Ward partner Hayley Mitchell and senior associate Steven Jell said that although flexibility is an inherent feature of discretionary trusts, this makes it difficult to provide certainty in how the assets of the trust will be dealt with after death.
Ms Mitchell and Mr Jell noted the challenge for advisers is to ensure that the estate plan effectively deals with transferring control of the trust in accordance with the client’s wishes.
“Depending on the client’s strategy and the level of risk of an estate dispute, sometimes it will be preferable to pass control outside the terms of the will,” Ms Mitchell said.
“To transfer the control of a trust, it is necessary to look at both the succession of the trustee and shares in a corporate trustee and the power to remove and appoint trustees commonly held by a person referred to as an appointor, principal or guardian.”
Whether control is being passed through the will or a variation to the trust deed, Mr Jell noted it is absolutely necessary to read and understand the deed establishing the trust and any varying deeds, the constitution for a corporate trustee, and voting rights attached to the shares and how the shares in any corporate trustee are dealt with as well as any power of appointment.
“Generally, the person who becomes the trustee or director of a corporate trustee will have a discretion as to how the assets and income of the trust are distributed,” Mr Jell said.
“In many cases, ensuring that the shares in the corporate trustee are transferred to the designated controllers will not be enough to ensure that those persons will take control of the trust. It will also usually require a change to the constitution.
“Most but not all trust deeds stipulate that a designated person commonly referred to as an appointor, principal or guardian has the power to remove a trustee and appoint a replacement.
“It is common for trust deeds to include default terms passing this power to the executor of the last surviving appointor. But is this fallback position in line with what that person intends?”
One of the ongoing considerations when passing control of the trust, according to Ms Mitchell, is to give a statement of wishes and directions to those who have been nominated to control the trusts.
“This strategy may not achieve the intended outcome in all situations as it relies upon the replacement controllers willingly upholding the directions of their predecessor,” she said.
“Alternatively, it is possible to create fixed entitlements for certain designated beneficiaries. Done properly, these changes will not trigger any adverse tax or duty implications; however, care must be taken when implementing a strategy like this.”
Mr Jell said there are also strategies to separate control and value between beneficiaries.
“For example, leaving some children in control of a family business operating through a trust (because they have been working in it) but leav[ing] some of the value in the business to other children,” he said.
“Consideration should be given to whether to include provisions to reduce the risk of the assets of a family trust being dealt with as part of a matrimonial property pool.
“One aspect that seems to be commonly overlooked is that most discretionary trust deeds allow a wide flexibility to amend the deed. Unless these powers of amendment are restricted, any plans put in place before death may be unwound later.”
