The second generation: trusts and succession planning

Assets held in trusts can be problematic when it comes to estate planning. Why? Because the fundamental element of a trust is that it holds assets on behalf of/for the benefit of someone else.

Despite what you might think; trust assets are not your assets.

There are a variety of different types of trusts, and they all have different features. This means they all have different implications when it comes to estate planning.

For the purpose of this article, we will look at the most common form of trust used in personal asset structuring – the discretionary trust. These are commonly known as family trusts and accountants love them because they allow wealth to be flexibly distributed amongst family members and companies within the family (which may reduce tax).

Despite these being the most common form of trust, they are often the most difficult to deal with when it comes to succession planning. This is because the key feature of a discretionary trust is that no one is actually entitled to the income or capital of the trust. The trustee of the trust has complete discretion to decide who receives income and/or capital of the trust at any given time.

There are usually two key roles to consider when dealing with discretionary trusts and succession planning; the trustee (day to day control) and the appointor (ultimate control).

Often these trusts are set up with Mum and/or Dad in control at each level. They control the trust as they wish during their lifetime, and there usually aren’t any issues. However when they die, all they can do is pass over control of the trust; that is, the trust continues to exist irrespective of their death. The trust assets aren’t their assets and, once they hand over control, they can’t guarantee how the trust will operate or who will benefit from it.

In our experience, this poses a whole range of questions for Mum and Dad when it comes to their estate planning. These include:

  • Who is to control the trust?
  • If there are two or more children to pass control to, how does decision making work? Is it majority rules, special majority rules or are unanimous decisions required?
  • What if one of the children has closer ties to an asset that is held via the trust (EG a business owned by the trust either directly or via a trading company)? Are they expected to benefit from that asset above the others?
  • What if there are different classes of assets that you’d prefer different children benefit from?
  • What happens if one of the children dies? Are the grandchildren expected to be factored in? If so, who looks after their interests?
  • What about the children’s risk factors? What about their partners? What if they are bad with money? What if they aren’t good with decisions/paperwork/aren’t business minded?

Transitioning wealth to the next generation can be difficult even in the best of circumstance. When trusts are involved, there are a lot of questions to be answered.

Our job, as your adviser, is to assist you in recognising the practicalities and guide you based on your priorities.

If you wish to discuss your trust or other estate planning matters please contact our Estate Planning team on (02) 4027 2900.