Family trusts, also known as discretionary trusts, are widely used for managing businesses, investments, and asset succession. While advantageous, they pose inherent risks that often surface after the initial trustees—the trust founders—have passed away or disengaged.
In recent years, disputes over family trusts have surged among the second generation. These conflicts typically arise from competing objectives or unilateral control by one member, resulting in unfair distribution of trust assets and income. The situation is also common where blended families are involved.
The primary challenge with family trusts lies in their discretionary nature. Despite trustees managing day-to-day operations and major decisions like investments and distributions, ultimate control resides with the "appointor," often specified in the trust deed under various titles such as "guardian" or "principal."
Unlike personal estates governed by wills, trusts endure independently beyond the lifetimes of their creators. This longevity necessitates careful succession planning to ensure seamless management and alignment with family objectives.
Strategies for Trust Succession
1. Succession Planning in the Trust Deed
Some trusts, especially those holding specific assets like family farms, establish clear successor plans within the original trust deed. This proactive approach specifies when and how new appointors assume control—be it on mental incapacity, death, or an agreed event.
While beneficial for clarity, amending successor appointors post-establishment can be cumbersome.
2. Conditional Deed of Appointment
A Conditional Deed of Appointment allows trustees to designate successors under specific conditions, such as incapacity. This flexible tool enables timely planning and can be adjusted before triggering events occur.
However, once enacted, it becomes binding upon the specified conditions.
3. Appointment of Successors via Will
Some trust deeds permit appointors to name successors in their wills. Though straightforward, this approach doesn't address interim periods of incapacity. Legal representatives may step in temporarily, complicating smooth succession.
4. Corporate Trustee Share Split and Constitution Updates
Many family trusts opt for corporate trustees to enhance flexibility and asset protection. Initially structured with a single share, these entities can face complications during succession when multiple beneficiaries emerge. We usually come across this issue when clients have set up their own companies, oblivious to the technicalities or potential problems that may surface in the future. Fixing the problem then becomes expense.
Splitting shares into a divisible number, such as 300, ensures equitable distribution among intended beneficiaries. Similarly, amending corporate constitutions to mandate unanimous decisions among successor shareholders prevents power imbalances.
Conclusion
Family trusts offer versatile intergenerational investment solutions but demand foresight and strategic planning to mitigate inherent risks. By adopting tailored succession strategies early on, trustees can safeguard trust integrity and align with evolving family dynamics. There is a myriad of issues that need to be considered, not least succession planning, before a Trust comes into being. For this reason, you should ensure that you involve professionals such as Symmetry Accounting & Tax who have vast experience in this area and will ensure that your structure is set up correctly from the beginning avoiding costly mistakes.
תגובות