THE “FAMILY” TRUST: What is it and do you need one? 21 Aug 2016
What is a Family Trust?
A Trust is a structure through which assets are transferred from one person as owner (“the Settlor”) to others (“the Trustees”) for the benefit of third parties (“the Beneficiaries”). The Trustees legally own the assets (“Trust Fund”) and the Trust Deed tells the Trustees how the Trust Fund is to be dealt with.
What is the best structure?
The Courts have said that although a sole Settlor can also be the sole Trustee, he/she cannot be the sole Beneficiary (see our article on the Clayton case here). This is because there is then no legal split of asset ownership between Trustees as legal owners and Beneficiaries as equitable owners. A Settlor may also be a Trustee and a Beneficiary, but it is best practice he/she is joined by an independent Trustee (ie: non-family).
What are the benefits of using your Lawyer's Company as an Independent Trustee?
It is harder for others to claim that the Trust is a sham (not a real Trust) from the outset, because all Trustees (including the independent Trustee) must agree on actions taken.
There is a more professional and objective approach to the Trust’s Administration. This reduces bad decisions and risk by ensuring the following issues are addressed at regular Trustee meetings:
- Whether the investment strategy is being followed
- The needs and wishes of all Beneficiaries
- Beneficiaries changing expectations. (This could result in a claim by a beneficiary who has been permitted to increase the value of a property owned by the Trust)
- If there’s a tax liability that it is satisfied before any assets are distributed to Beneficiaries
- That the correct powers under the Trust deed are used by Trustees to pass certain resolutions at their meetings.
What are a Trust's possible benefits?
From an asset protection perspective it may offer protection from:
- Estate or death duties if ever reintroduced by the Government or from a future “wealth” tax such as capital gains.
- Family claims against your personal estate after death, because Trust assets are owned by the Trustees and not by you personally.
- Claims by creditors upon a business failure.
- Relationship (formerly “matrimonial”) property claims by a spouse or partner. However, a Section 21 Contracting Out Agreement (“pre-nuptial Agreement”) under the Property Relationships Act with your spouse or partner should usually precede any asset transfer to a new Trust.
From a succession planning perspective:
- Different Beneficiaries may receive tax paid income.
- Tax-free distributions may be made to different Beneficiaries following asset sales.
- Which Beneficiaries receive what, and when, is decided solely by the Trustees.
- Your Trust could own shares in a Company, which owns a Business, and so limit the Trust’s risk and liability to the Company’s creditors.
- Your Trust could provide for the special needs of a disabled family member both before and after your death.
- Your Trust is the best device to facilitate the growth, protection and transfer of assets (wealth) for the benefit of your family and of future generations. (Wills are currently more open to challenge under present laws.)
Every situation is unique so please discuss your particular case with a professional advisor who can provide you with a tailored solution.