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Legal Tip 148: The Biggest Issue with Discretionary Trusts

Discussion in 'Legal Issues' started by Terry_w, 18th Oct, 2016.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    The Biggest Issue with Discretionary Trusts: Succession on Death


    In my view, the biggest issue with discretionary trust is succession. Trust assets do not belong to any one beneficiary, or the person that controls the trust, as such they cannot be passed via a person’s will.


    People often say things like ‘my trust’ or ‘my property held in the trust’ – but this is not correct. If you have set up a trust you may control the trust, but this control is only temporary. The assets of the trust are not yours and you should not treat them as such.


    On the death of the person that controls the trustee company the shares of the company can pass via the will or the intestacy laws. I have yet to see a client who has specifically considered the importance of this. Whoever ends up with the shares will control the trust (until the appointor removes the company as trustee).


    It is also rare for people to consider the passing on of the appointor roles. Many trust deeds make the executor of the will as the next appointor – which could be the public trustee or a distant relative. If there is no will it could be anyone who applies for administration of the estate.


    Sometimes clients have considered this and have the spouse as the backup
    backup appointor. But they rarely consider the next step – what if both die together. Or what would happen when the spouse eventually dies?


    Any relative who gets into the position of Appointor would also probably be a beneficiary of the trust. That means they can take control of the trustee position and then distribute all income and all capital of the trust to themselves (subject to the terms of the trust).


    Often the hope is that the children will control the appointor position. Assuming the position can be passed to them this can still pose problems if there is more than 1 child.


    What could happen if there are 2 (adult) children who are both appointors and there is a disagreement? A Mexican standoff could happen. Is it possible that one child could dominate the other, and effectively control the trust. Could one take control of the trustee position and benefit themselves at the expense of their sibling?


    What if there are 3 children – 2 could gang up on the third perhaps.


    What if there is a blended family. Brady bunch style. Mike dies leaving Carol in control of the trust – would she cause his children (who are not hers) to benefit? What if both Mike and Carol die and the children take control – 3 from each side, even, and then one of them dies.


    Arguments or disputes can arise for any reason:

    - Whether to sell trust property

    - Whether to access equity

    - Whether to distribute income unevenly

    - Whether to wind up the trust

    - Whether the benefits of one beneficiary should go to their children on their death

    An example of the last point – Brady Bunch with the mum and dad dead. The 6 children control the trust and distribute all income evenly 1/6th each. Greg dies. Does his notional share of the income of the trust go to his children or do the other 5 Brady Bunch members now split the income of the trust 1/5ths each? This sort of thing cannot be built into the trust deed as if it was it would no longer be discretionary.


    Many things to consider.
     
    Last edited: 18th Oct, 2016
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  2. RPI

    RPI Property Lawyer, Town Planner Business Member

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    Excellent Tip Terry

    Given the rising land values and the unmoving land tax thresholds in QLD I often end up recommending that someone buying property in a trust reconsiders and buys in the number of trusts that they have children. (if you have 5 like me it is more problematic but 2 works well). Each trust then has the role of appointor willed to a particular child.
     
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  3. Bran

    Bran Well-Known Member

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    I bet there is a long list of problems having 5. ;)
    3 is hard enough

    Can you explain what you mean by "buys in the number of trusts that they have children". Does this necessitate 5 purchases to have 5 trusts?
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    That is a good strategy RPI

    If yo have 3 children set up 3 trusts and when you die you leave control of each trust to a separate child. That way they don't need to deal with each other but can go their separate ways.

    I think I have written about this:
    Legal Tip 116: Multiple Trusts as an Estate Planning Strategy https://propertychat.com.au/communi...e-trusts-as-an-estate-planning-strategy.7672/

    The problem is each trust will have slightly different values as the assets will be growth at different rates (unless the trusts soley invest in the same shares perhaps).
     
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  5. kierank

    kierank Well-Known Member

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    We have two children and two trusts (with separate trustee companies) that own the majority of our IPs. On our death, each child will get the shares of one trustee company and appoint themselves as the appointee of that trust.

    When this was set up, the value of the IPs in each trust was roughly the same. This has changed over time and one trust is worth somewhat more than the other (the trust with the highest asset value changes over time based on different capital growth).

    In our Wills, it specifies that both trust assets be formally valued (even though the assets are not part of our Wills) and an adjustment calculated to account for the different asset values and paid from our Estate to the child with the lower value trust, prior to dividing up the remainder of the Estate.

    This is aimed at overcoming this issue. I think this is how our Wills are set up (I am not at home so I can't double check).
     
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  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    That is a great way to do it Kierank. Just keep in mind the children probably cannot appoint themselves as appointors - the current appointor might have to do that, depending on the deed wording.
     
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  7. RPI

    RPI Property Lawyer, Town Planner Business Member

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    As in 1 house owned by 2 trusts. That way each child gets willed control of half of the asset and as a bonus $700k land value before paying land tax.

    You could use 1 corporate trustee and 2 x trusts as long as the beneficiaries are different, eg Mum on one and Dad on other. Some legal as well as accounting and financing considerations with that but will leave that side to the experts there to comment
     
    Last edited: 18th Oct, 2016
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  8. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Or leave to estate trust/s (testamentary) and save a load of cash in your lifetime. At even $500 per trust per year thats a high cost. (and I cant think of a $500 trust annual fee)

    This can also see a range of tax benefits for some beneficiaries (incl minors) and provide them with real asset protection from their wife later etc since they wont own any property. Also can be used so if hubby dies before wife his assets dont form part of her estate so her new partner takes it all.

    All sound reasons for legal advice and estate planning so intended beneficiaries get their benefits
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    In QLD the land tax savings would be more than the annual fees for running the trusts - in many cases.
     
  10. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  12. Blacky

    Blacky Well-Known Member

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    Good points.
    In some ways there are almost too many "what ifs" to consider which makes everything too complicated to bother with. Just leave equal shares and let them battle it out (or leave them with nothing and give it all to charity). You'll be dead and gone in any case.

    I'm reviewing my will at the moment (given I got married last year the update is over due).
    How often should you update a will? Seems like a lot of the details of a will could change very regularly..

    Blacky
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You should review your will when major events happen:
    marriage
    death of a relative
    birth of children and grandchildren
    new assets acquired
    falling outs happen
    new pets?
     
  14. RPI

    RPI Property Lawyer, Town Planner Business Member

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    Thousands and thousands in land tax each year makes the trust maintenance fees cheap. There is no trust cloning in QLD, no duty exemption for related party transfer, you hit that threshold and you want to sort it out then you are paying CGT on the sale and transfer duty on the purchase.
     
  15. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Yes the dreaded land tax can never be ignored.