Legal Tip 303: Disputes Involving Control of a Trust

Discussion in 'Legal Issues' started by Terry_w, 2nd Sep, 2020.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    People set up trusts and think to themselves this is ‘my’ trust. This is not actually the case, even if you are the sole trustee, appointor and the only one to ever have received the benefits of income from the trust. You should probably think of yourself as merely in temporary control.

    At some point you will no longer be in control. This could be voluntary such as stepping down and letting other family members take control, or involuntary such as going insane, bankrupt, or otherwise becoming legally disabled, or even death. Sometimes divorce or separation will mean loss of control too.

    In these situations, others can fight over control. Brothers and sisters can turn against each other. Brothers can try to shut out other brothers. Spouses of the second marriage can try to oust the kids of the first marriage etc.

    When all this happens those, who control the trust can usually start giving themselves or their faction of the family the benefits to the exclusion of the others.


    Example

    Homer has 2 kids. His wife is dead. He wants to save money to becomes Trustee of his SMSF but he needs a second trustee for trust law reasons so asks Lisa, his daughter to be a co-trustee.

    Homer assumes this super will be paid into his estate and draws up his will to leave his super to his 2 children equally. Later he learns that the trustee of the SMSF will decide whether to give the benefits directly to the children or to the estate. If Lisa was the sole trustee she could give it to herself so Homer does a Binding Death Benefit Nomination, or BDBN, forcing the trustee to pay the estate.

    Homer gets hit by a bus shortly after and dies leaving $1mil in super.

    Lisa is now the sole trustee and she appoints her husband as joint trustee, perhaps so it seems she is not the only one making decisions. She looks at the BDBN and finds it has only one witness when 2 were needed. It is invalid. (or she might have shredded it).

    She and her husband now decide the death benefits should be paid to Lisa only and not to the estate and not to Bart.

    She does this and conforms to the requirements of the deed which basically allows the trustee to decide which of the dependants of the deceased member were to get the benefits.

    Bart sues her – yet there is not much that he can sue on as Lisa has not broken any law or gone against the trust deed. Every action was valid. The blame lies with Homer, and possibly his advisor who helped with the BDBN.

    (based on a real case).


    Example 2

    Homer sets up a discretionary trust which has a large value when Homer dies. Bart takes over the control of the Appointor position. Lisa becomes joint appointor next year when she reaches she age of 18.

    Bugger this Bart thinks. Lisa will cause trouble, so he takes control of the trustee and distributes all of its assets to his new wife. Lisa misses out because the trust is empty when she has her birthday. Bart has complied with the terms of the trust and has done nothing against the deed or trust law.


    Example 3

    Ned has 3 kids and learns from Homer’s mistakes. Ned passes control of the trust to all three kids at the same time by making them appointors. And shareholders and directors of the trustee company. They are all equally in control – for the moment.

    The trouble is the appointor position requires a majority decision.

    Todd and Rodd gang up on the 3rd brother Bobb. Using their majority as Appointors they nominate a new company which they are both directors and shareholders of and appoint this as trustee. Bobb loses any role in the control. But he is still a discretionary beneficiary so there is hope – or that is what he tells himself.

    Come 30 June Todd and Rodd have causes the trustee to distribute to themselves and their spouses and nothing to Bobb.

    Not much that Bobb can do as his only right is to be considered as a beneficiary. The trust deed allows the trustee to benefit themselves and their family and the deed has been followed to the letter.
     
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  2. The.Night.King

    The.Night.King Well-Known Member

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    What's the best way then to make sure when I die my kids will get equal share, equal control and not stuff themselves out of greed? I thought executing a BDBN and appointors solves this problem, apparently not.
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Discretionary trusts - it's basically not possible. Unless you have one trust per child.
    With super you have a greater chance
     
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  4. SatayKing

    SatayKing Well-Known Member

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    Went down the Beneficiary Controlled Testamentary Trust path.

    Good heads up so thanks @Terry_w as I've been intending to review my Will to see if the provisions need revising.
     
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  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Keep in mind the only the primary beneficiary will be able to control the testamentary trust while they are alive and able. If dead, bankrupt or incapacitated the same issues will arise.

    One other way to make sure you have control of a trust's assets on death is to automatically vest it with your death, or the last of you and the spouse to die to vest it with you being the capital beneficiary - will weaken asset protection potentially.
     
  6. SatayKing

    SatayKing Well-Known Member

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    That was a riveting bed-time read!

    Hard to put down with such enthralling things such as Aggregate Wealth Schedules, Disqualified Persons, Family Breakdown provisions, Special Purpose Trusts, Legal Disability, Vesting and other engrossing aspects.

    If I had to administer the estate, I'd be knocking on the door of a solicitor the first thing in the morning.
     
  7. The.Night.King

    The.Night.King Well-Known Member

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    I have a solution. When I die my will states SELL everything and divide the proceeds after fees equally to my heirs.

    Will this make a difference? I guess on properties owned by Corporate structture probably not.
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    that won't have any effect unless you own the properties yourself.
     
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