We are sometimes approached with families that want to keep substantial business and property assets in the direct family line for future generations. Often a family will have accumulated a large amount of property and will want to preserve the future capital of the trust for direct lineal descendants only. While “out-laws” are welcomed, the family wants the asset to only pass down the direct family line. How do they work? A legacy trust has a broad range of beneficiaries, including spouses of direct lineal descendants, for the income of the trust each year. However, spouses of direct lineal descendants are typically excluded from benefiting from the capital of the trust (so they may be entitled to share in trust income, but are not entitled to the trust’s assets). You can however limit natural heirs to all income and all capital (I personally have not yet done this). In the drafting of these trusts you must make sure that the trustee has a broad power to determine the income of the trust from year to year and may, for example, determine that capital gains are in fact income. Although this may allow some capital receipts to be received by the “out-laws” , removing this flexibility may result in adverse tax consequences – especially in that hands of a person not fully conversant with a legacy trust. In addition, the restrictions on the identities of the trustees and the appointors should ensure that this power is only exercised for the correct purposes and only in favour of beneficiaries the trustees intend should benefit. Quite often the deed will preclude spouses of lineal descendants from being appointors of a legacy trust. Do they work for the Family Court? The Family Court has quite wide powers and, prima facie, can look through a legacy trust. I have however heard of cases where a legacy type trust was effective in Family Court – Anison and Anison and Anor [2015] FamCA 973 In this instance an Accredited Family Law Specialist should be contacted. And the above case was not known to me until very recently (they are not clients). So what is the main benefit? A family that is concerned about preserving its business and property assets for future generations typically manages their intent through a family constitution that sets out how the family communicates, resolves conflict and promotes family members. The Mitsuii Family, for example, created their family constitution in 1722. To me, a legacy trust is typically most helpful in that in re-inforces the views of the founding parents. Our clients typically use culture as a strategy to prevent legal disputes. Great families keep their dirty laundry private and work hard to stop fights before they start. These legacy trust deeds are part of the cultural tools available. I have often seen these type of trusts referred to as “Lineal Descendents Discretionary Trust” or a “Bloodline Trust TM”. If you "google" those words you will find firms offering these type of deed. Each deed needs to be carefully considered and carefully managed within the overall families goals and objectives. What is important is that families wanting to create a sustainable legacy with their property assets have more weapons at their disposal than what is ordinarily understood.
These are just discretionary trusts with more limited beneficiaries. If set up in a will they are more commonly referred to as testamentary trusts or testamentary discretionary trusts.
A testamentary trust can be very tax effective if beneficiaries are children. Each child can earn income and pay no tax as they have access to the existing tax free threshold of the day before paying any tax, currently its $18200. I'm not sure if the low income tax offset would apply as well, possibly raising the threshold even further?
No need to have spouses listed and my opinion is better if they are not listed. You can still get income to a spouse of your off spring by having the off spring setup a discretionary trust that allows distribution to their spouse. Control of each trust and potential beneficiaries are vital.
