Succession Planning for the Family Trust – Getting Started

This article was originally published by the Retirement and Estate Planning Bulletin.

According to statistics published on the Australian Taxation Office website, in the 2016-17 income year there were 857,000 trusts that lodged tax returns with recorded 'total business income' ranging from $<0 (ie trusts that make losses) to in excess of $250 million.  Trusts are extremely common structures used by many families in Australia for operating small businesses, complex investment enterprises and for passive investment activity.  

Given the asset protection planning benefits and tax planning benefits associated with trusts it is not surprising that a great deal of family wealth in Australia is held in trust structures.

If you are one of these families with a trust (or trusts) as part of your family investment structures you will, at some stage, need to grapple with the succession planning for the trust.  Specifically, if you are the person (or one of the persons) who is currently controlling operations of the trust, you will need to consider what should happen to this trust if you die or lose the legal capacity to operate the trust.

This article highlights some of the important preliminary issues that you will need to consider, and ultimately reach a conclusion on, so that an appropriate succession plan can be developed and implemented for your trust.  As a first step, you need to understand what you are actually dealing with.

Understanding the nature of your trust(s)

All families are different, and in different families, trusts are used for different purposes.  All trusts are also different.  They will likely have different terms, hold different assets, do different things for the family and be in different financial positions.

It is a common mistake in estate and succession planning to think that the assets in your trust are automatically dealt with by your Will.  While the trust assets are indeed part of your family wealth, they are not ‘owned’ by you and are not part of your personal estate.  Consequently, the assets in your trust will not be dealt with by your Will unless the trust terminates after your death and the trust assets are actually distributed to your deceased estate.

You can however, in a number of ways influence what happens to the trust and the trust assets after your death.  Most commonly this influence can be achieved by amending the terms of the trust or by dealing appropriately with the ongoing control of the trust, or perhaps both.  

In dealing with succession planning for trusts it is important to understand with clarity the following factual circumstances of the trust and future intentions for the trust.  The following points should help you focus on some of the key aspects of succession planning for your trust.

1. How many trusts are there in the family group?

Of the 857,000 trusts on the ATO records, there may be more than one trust that is connected to any one family....and often for good reason.  For many families that have a diverse range of investments, it is often sensible to identify the risk profiles of the different investments to be undertaken and separate those investments into different entities for asset protection purposes.  One of the golden rules of asset protection planning is to keep passive 'non at risk' assets separate from active 'at risk' activities. For example, the conduct of a business has a very different risk profile to passively investing in an ungeared portfolio of listed equities.  If the family business fails, you don't want the passive equities portfolio to be at risk for the debts of the business.  Obeying this golden rule would suggest that you need a trust through which to conduct the family business and also a second trust to hold the passive equities portfolio.

Similarly, the conduct of a complex property development as part of a joint venture with an unrelated business partner will ordinarily carry significantly more business risks than an investment in a traditional geared rental property.  Although both of these investments relate to property the different risk profiles of the investments suggest that, from a protection planning perspective, they should be carried out in different trusts.  Further, it is very common for property developers to undertake each of their projects in a different entity.

In some circumstances tax planning might suggest the need for certain types of assets (eg shares paying franked dividends) to be held in a different trust to the trust that owns other investments. 

2. What does the trust(s) do?

Are the activities of the trust active (eg the family business or the property development) or are they more passive in nature?  Does the activity of the trust involve significant relationships with other parties, for example, banks that provide funding, suppliers to the business, customers, key tenants?

3. Who is involved in the activities of each of the trusts?

Is the trust critically dependent on any specific person(s) to be able to conduct its activities?  Is it only one of the matriarch or patriarchs of the family who conducts all of the activities of all of the trusts or is the other spouse also actively involved?  Are any of the children involved in any of the activities of any of the trusts (especially relevant if, for example, a child is already actively conducting the family business through the trust?  Are there third parties (eg an external director or members of a management committee) that perform important functions for the trust or for the family business and how will their involvement be affected by the death of the matriarch or patriarch of the family? 

4. What is the financial position of the trust?

What is the net value of the trust?  Is there a high gearing ratio?  Is the trust financially stable and growing in capital value?  Does it generate satisfactory income returns to meet expenses?  Are there debts owing to family members?  Is the trust complex and expensive to operate?

5. What sort of trust is it?

Trusts are not all the same.  From a legal perspective there are many similarities that exist in all trusts but there can also be significant differences that can be important in the succession planning.  From a practical perspective, for family investment purposes trusts tend to fall into the following broad categories:  discretionary trust, fixed trust, hybrid trust and unit trust.  The terms of the trust deed governing the trust will reveal which of these four categories the trust will fall into.  Superannuation funds are also a special type of trust.

6. Who controls the decision making in the trust?

Depending on their terms, trusts can have various control offices that perform different roles.  The trustee office is an obvious and important control office that exists in all trusts, but there might be other offices that also exist in your trust, in addition to the trustee.  Understanding what control offices exist in your trust, who currently holds those offices and on what terms, and what happens to those control offices if the current holders of the office die are absolutely essential to successful succession planning for your trust.

The succession planning will involve considering who should hold these important control offices into the future, the mechanical means by which control is passed onto these people, when these people should hold these offices and on what terms they should hold the office.

Critical to successful succession planning is the achieving of these objectives.

7. Who is intended to benefit from the trust and who actually does benefit from the trust?

The trust deed will contain a definition of "beneficiaries" and the financial records of the trust will contain information as to which of the beneficiaries have benefitted over the years and to what extent.

Following the death of the matriarch or patriarch of the family and/or the current controller(s) of the trust, who is intended to benefit from the trust, how are those people intended to benefit and when are those people intended to benefit?  Is the definition of "beneficiaries" appropriate to achieve your objectives?  As with point 6, critical to successful succession planning is the achieving of these objectives.  

Conclusion

Once you and your adviser have a clear understanding of the nature of your trust(s) you will then be in a good position to sensibly plan for the future of the trust, ie the succession planning, and to implement appropriate strategies to achieve your objectives.  Doing the groundwork is essential.

Authors: Belinda Cao and Andrew Frankland

See related articles - 

Succession Planning for the Family Trust - Common Approaches

Succession Planning for the Family Trust - Helpful hints when dealing with the detail