Discretionary trusts are generally established naming mum and dad as the individual trustees (or as the directors of the corporate trustee). The trustee has the day-to-day control and management of the trust.
Unfortunately, the role that inherently has the most power is generally the role that is almost always paid little attention to by clients. This is the role of the “appointor”, “principal” or “guardian”, as the case maybe depending on the trust deed. This role is important because the appointor has the power to retire and appoint trustees for the trust. Often, it is either one of mum or dad who is named as the appointor.
Reviewing the trust deed for succession purposes
The estate planning issue with discretionary trusts is ensuring that control passes as the clients intend – that is, gifting the shares in the corporate trustee to the intended beneficiaries/controllers but more importantly, ensuring the appointment of the successor appointor/s are effective.
Most trust deeds these days include provisions for the succession of the role of appointor by allowing the current appointor to name a successor either by deed or by will and failing any appointment prior to the appointor’s death, then the appointor’s legal personal representative (eg: the executor) becomes the default controller of the trust.
Unfortunately, not all trust deeds provide clients with the flexibility of appointing a successor appointor and the default position is that the executor/legal personal representative of the deceased appointor becomes the controller of the trust.
The default position does not necessarily pose any major issues on the death of either mum or dad (ie: if mum and dad have appointed each other as the executor of their respective estates). The default succession of control only poses an issue on the death of the survivor of mum or dad.
The reviewer needs to be aware that trust deeds, depending on how long since the trust was established or last varied, may have peculiar appointor clauses or powers to vary (eg: only dad can vary the trust without any provision for how the trust can be varied if dad has lost capacity or passed away).
Reviewing the trust deed is an important aspect of estate planning to ensure the recommended strategies can be properly implemented.
Steve and Catherine have three adult sons, all of whom are married with children of their own. Steve and Catherine run a family business and all sons work in the business. Most of Steve and Catherine’s assets are held in the SC Family Trust. SC Pty Ltd is the trustee of the trust with Steve and Catherine as equal shareholders. Steve is the sole appointor.
On Steve’s death, it is their joint intention for control of the trust to pass to Catherine. On Catherine’s death, it is their intention for their eldest son, Tom, to become the sole controller and on his death, Tom’s two younger siblings become the joint controllers.
The trust deed for the SC Family Trust does not have any provisions allowing Steve and or Catherine to nominate a successor appointor and the default controller is the appointor’s executor.
By their wills, Steve and Catherine (in the absence of each other) appoint Tom as the reserve executor and then their two younger sons as joint reserve executors.
What’s the problem?
While the default position does not pose any major issues if Catherine survives Steve, it can become problematic if Tom becomes the appointor. If Tom dies while he is appointor of the SC Family Trust and based on the trust deed as it stands, then it will be Tom’s executor appointed under his will (eg: his spouse or children) who will take over Tom’s role as appointor and not Steve and Catherine’s remaining children as they intend.
Another problem that may have arisen if the people they intended to take control of the trust conflicted with the people they nominated as their executors. For example, if they had appointed all three sons as their executors, then this would have directly conflicted with who they intended to take over control of the SC Family Trust (ie: instead of Tom initially, it would be all three sons jointly controlling the trust).
How do we solve the problem?
Depending on the circumstances, the clients’ objectives and whether the trust deed allows it, a deed of variation of the trust deed can be prepared to rectify the situation by including the power for an appointor to appoint a successor.
A clause in the clients’ wills can then be included expressing their intentions regarding the succession of control of the trust.
To provide even further certainty that the succession of control will pass as the clients intend, it may be appropriate to “hardwire” the succession in the deed where the appointor is named. For example, including a clause amending the particulars of the trust by naming all of the appointors, including successor appointors. The issue with implementing this strategy is that it makes the succession planning more brittle by removing some of the flexibility as well as ensuring that these provisions are considered when their estate planning is reviewed in the future.
Each estate plan differs from client to client and care should be taken when considering the most appropriate strategy for the circumstances as well as for other entities that form part of their structure – such as discretionary trusts, self managed superannuation funds, business interests and companies. Estate plans can also be further complicated when there is a blended family and risks can arise in relation to potential family provision applications.
Our Estate Law team will be happy to assist with matters regarding succession of control of entities, succession for blended families and estate planning in general.