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SMSF auditors have been witness to some outlandish expense claims and get frequently asked: “Can an SMSF claim this as a deduction?”
Flexibility is an inherent feature of discretionary trusts. However, this makes it difficult to provide certainty in how the assets of the trust will be dealt with after death. Generally, a person will want their trust to continue after their death for the benefit of the next generation rather than the assets sold off or distributed on death, particularly where they have built up a significant family business in a trust structure.
Many are not aware that the assets in their trusts cannot be transferred under their will.
Control is key
The challenge for advisers is to ensure that the estate plan effectively deals with transferring control of the trust in accordance with the client’s wishes. Depending on the client’s strategy and the level of risk of an estate dispute, sometimes it will be preferable to pass control outside the terms of the will.
To transfer the control of a trust it is necessary to look at both:
Opportunities to get it right
Regardless of whether control is being passed through the will or a variation to the trust deed, it is absolutely necessary to read and understand:
Generally, the person who becomes the trustee or director of a corporate trustee will have a discretion as to how the assets and income of the trust are distributed.
In many cases, ensuring that the shares in the corporate trustee are transferred to the designated controllers will not be enough to ensure that those persons will take control of the trust. It will also usually require a change to the constitution.
Most (but not all) trust deeds stipulate that a designated person (commonly referred to as an appointor, principal or guardian) has the power to remove a trustee and appoint a replacement.
It is common for trust deeds to include default terms passing this power to the executor of the last surviving appointor.
But is this fall-back position in line with what that person intends?
The following are some tips and considerations when passing control of trusts:
When it goes wrong
Usually, the cost of proactively dealing with these issues now as part of an estate plan will be insignificant compared with the costs later incurred by the next generation, and the time, effort and stress involved with any dispute.
If you or one of your clients has a trust as part of their investment or business structure, the ongoing control of the trust must be considered as part of an estate plan.
Authors: Steven Jell, senior associate, Cooper Grace Ward, and Hayley Mitchell, partner, Cooper Grace Ward