Is the change in control of trusts as you actually intend?

8 March 2022

Trusts are a preferred vehicle to accumulate and preserve investments for the benefit of the family group. Overtime assets with significant value are built up and as a result careful consideration is required to ensure the appropriate persons are given control to continue your wishes as to how your trusts are to be administered for the benefit of the next generation.

Passing on control of your trust

Ascertaining the successor controllers of a discretionary trust can be complicated. Careful consideration must be given to ensure the safeguarding of assets that have been accumulated over a lifetime will be achieved, as well as facilitating distributions to the intended beneficiaries, to protect your family’s future financial security. 

We observe there are a number of common objectives when assisting clients determine the future control of their trusts;

  • a desire to preserve assets in an existing trust so as not to trigger stamp duty and accelerate capital gains tax assessments;
  • ensuring that only lineal descendants can benefit from the capital of the trust;
  • concerns as to whether tensions could arise amongst children due to the discretionary nature of trusts in contrast to desiring fixed entitlements.

As part of your estate planning, thought needs to be given to the following areas;

  1. who do you want to hold the power to appoint or remove the Trustee after the death of the current controllers?
     
  2. where the trust has a corporate Trustee, who do you want to own the shares and have the ability to appoint directors after the death of the current controllers?
     
  3. who do you want to give control as to how the income and capital of the trust is to be allocated to different beneficiaries and protect situations against benefiting some beneficiaries to the exclusion of others, including who you want to designate as having the right to vest the trust.

1. Appointor successor

In many cases, transferring the shares in a Corporate Trustee to the designated controllers will not alone be enough to ensure those persons take control of the trust. 

Most trust deeds include terms that give a person the power to remove a Trustee and appoint a replacement. This person is commonly referred to as the Appointor.

Depending on the terms of the deed a succeeding Appointer can be nominated;

  • in the trust deed itself, or with an amendment to the deed,
  • in the Will of the current Appointor,
  • and if no replacement is appointed, the executors of a deceased Appointor.

If there is a risk of a deceased estate dispute, it would be wise to name the successor in the trust deed itself. This may require an amendment to the trust deed.

Usually, the nomination around the successor Appointor should align with whom will receive the shares in the Trustee company.

Care needs to be taken to ensure nomination of the succeeding Appointor is executed and administered within the terms of the existing trust deed. It does require specialist trust law advice as in recent times, a  number of cases have determined that particular attempts to change the Appointor through a deed amendment are invalid as the drafting of the original trust deed did not permit such a change. It is not uncommon for trust deeds, particularly older deeds, to not allow for variations or amendments to the Appointor provisions.

2. Shareholders of the Corporate Trustee 

When dealing with a Corporate Trustee, consideration needs to be given to who owns the shares in the company and therefore, holds the rights attaching to those shares.

Shares in a company that acts as Trustee will entitle the shareholder to have a degree of control of the trust because in some circumstances, such as the death of the only director, the shareholder can determine who acts as directors of the Trustee and makes the day-to-day decisions regarding the assets of the trust.

The ownership of the shares and thus control can be either;

  1. passed to the executors under the Will of the shareholder;
  2. passed to specifically named beneficiaries personally and not in their capacity as executors; or
  3. managed by different classes of shares in the company being issued to different persons.

The difference between the first two approaches is in the case of the second approach the shares do not form part of the assets of the estate but can be retained by the beneficiary personally. By retaining the shares, those persons can appoint themselves as directors of the Trustee and attend to the day-to-day decision making such as decisions around distributions of income and capital of the trust. It is acknowledged that nominating specific beneficiaries may not result in the desired outcome if the Will is challenged.

In such scenarios, the third approach may achieve the desired intent where redeemable special class shares are issued in the Corporate Trustee to the future designated controllers whilst the existing controllers are still alive.  On certain trigger events, the special class shares convert to ordinary shares.

3. Corporate Trustee Constitutions

Most private company constitutions require director and shareholder decisions to
be made by a majority. Accordingly, consideration needs to be given where multiple succeeding controllers are appointed by undertaking ‘what if ‘scenarios at both the Board level and Shareholder level in light of the decision-making matrix pursuant to the Constitution.

For example:

  • if the constitution for the Trustee company requires certain decisions, like director appointments to be a majority of shareholders, there could be situations where particular groups of shareholders outvote others and appoint themselves as the replacement directors of the Trustee.
  • this in turn would then extend to decisions around distributions of income or capital of the trust.

Various approaches to mitigate such risks involve amendments to the Constitution of the Trustee company including:

  • each shareholder has a right to be appointed a director or nominate a representative to act as a director of the Trustee company so that their interests are represented;
  • inserting terms stipulating that any decision of the Trustee to distribute income or capital of the trust other than equally between named beneficiaries requires the consent of all of those named beneficiaries;
  • certain key decisions must be made unanimously (e.g. decisions to amend the constitution or trust deed).

This article has focussed on Corporate Trustees as being the most common approach to modern day structures. If a trust instead has individual Trustees, it could be opportune to introduce a Corporate Trustee when considering successor appointments when an amending deed is required to reflect the changes in appointed successors. 

Other considerations

Loans from controllers to trusts

The existence of loans or unpaid entitlements owing by the trust to its controllers should be considered as part of their estate planning.

Consideration should be given as to the impact any bequest of loans or unpaid entitlements owing to controllers where they were left to say their estate, where the executors are not the same controllers of the trust.

For example, it may be desired for control of a particular trust to be left to one or more selected children. This could be particularly relevant where there is a family business conducted via a trust and operated by working children in the business. The other children may instead be bequeathed assets that fall outside of the trusts and form part of the deceased’s estate.

Such loans form part of the deceased’s assets whereby such loans could be called upon by the deceased estate putting cashflow pressures on the trading trust with the effective control of the trading trust being passed to its creditors, now being the executor.

Where loans receivable exist as part of an estate plan, consider whether;

  • it is prudent to formalise the terms of the loan covering loan repayment periods, terms and interest rates to avoid it being at called on death and creating cash flow problems for the trust;
  • security should be taken for the loan to secure its repayment;
  • the loan is better to be forgiven on death, although there could be tax implications of this option that should be examined.
Family Charters

There is an increased approach to formulate Family Charters combined with the situation where the deed appoints some of (or all) the children as the replacement controllers. The Family Charter is a governance document that contains the process about how a family wants the trust (and other entities within the family group) to be managed in the future. 

Although not legally binding, such a document contains information to prevent potential conflict and is a mechanism to introduce and manage the expectations of the next generation, including direction regarding how the current controllers would like the trust to be managed, investment ethos, philanthropic intentions and attitude towards income and capital distributions.

It shouldn’t be overlooked as to whether all your children in fact agree to assume control and continue with your trusts after your death. Such discussions ideally occur as part of your estate planning. We do at times witness tensions arising where control passes to several children with different aspirations and don’t share the same future objectives and/or investment risk profiles. Such matters can be covered in the Family Charter including vesting of specific assets from a trust to certain family members and decisions around whether strategies like trusts be wound up on death. 

Key Takeaways

Regardless of whether control is being effected by the terms of the trust deed or your Will, it is vital to refamiliarise, review and understand:

  1. the succession terms of the controlling parties in the existing trust deeds and any accompanying variations including whether those variations and the alleged appointment of various successors is valid;
     
  2. the constitution of the Corporate Trustee including the decision mechanisms, shareholder and director meeting proceedings and voting rights attached to the shares; and
     
  3. the terms in your Will to ensure it covers your intent as to how both the shares in any Corporate Trustee are dealt with together with the successor of the Appointor.

Transferring control of a trust is complicated. This article highlights the importance of giving proper consideration to the Trustees and Appointors of a trust and the shareholders and directors of a Corporate Trustee. Understanding the interrelation between these roles is essential.

Every trust is different, and every family circumstance is different. Accordingly, any changes or updates need to be undertaken with great care tailored to meet the desired intents of the current controllers.

If you would like to understand more about the above as to how it applies to your overall plans with regards to change in control of your structures, please contact the authors of this article.

Authors:

Michelle Saunders
Managing Director
Head of Strategy

Jemma Sanderson
Director
Head of SMSF & Succession

Marissa Bechta
Director
Head of Taxation Advisory

Simeran Cheema
Manager
Leader in Advisory Services

This newsletter is current as of 8 March 2022, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.
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