Many people use discretionary or family trusts in their asset holding, for perceived asset protection and income distribution advantages.
Often, these trust deeds are bought “off the shelf” by providing basic information to the supplier which then issues the trust deeds in a standard form.
For the purposes of estate planning, there are a number of issues which are critical where assets are held by a party as trustee for a discretionary trust. One aspect is that – if it is intended to pass over the trust benefits to a particular person – the will maker might want to ensure that the beneficiary is given the “power of appointment” which is the power under the trust deed to appoint a new trustee (this role is most often called “appointor” or “principal”). Otherwise the trust could be operated for the benefit of other beneficiaries.
When reviewing trust deeds for the purposes of estate planning, we often find – in widely used trust deeds – difficulties with the provisions relating to the power of appointment. Some do not allow the named appointor to appoint a person as their replacement in their will. In one that we reviewed recently, the clause provided that on the death of the appointor, the power could be exercised by their “legal representative” (i.e. their lawyer) which is likely to be an error because it was probably intended to have the power exercised by the appointor’s “personal representative” (meaning the executor of their will or administrator of their estate), which expression many trust deeds mangle by calling it “legal personal representative” which is actually an expression used in superannuation law where it is defined by sec 10 of the Superannuation Industry (Supervision) Act 1993, and which really should not be used in non-superannuation trust deeds unless it is properly defined, which it rarely if ever is.
In the same trust deed, the appointor would be automatically removed if they lost capacity or were bankrupted, which then led to the trustee being required to call a meeting of all beneficiaries, notwithstanding that there are potentially hundreds of possible beneficiaries given the wide nature of the scope of beneficiaries in discretionary trust deed, with then provisions for beneficiaries of certain classes having to “unanimously” agree on the new principal.
As a result, this particular trust deed – in a standard form and in wide use – contains areas of potential uncertainty and inconvenience.
Reviewing trust deeds is critical for effective estate planning, so that deficiencies or inconsistencies can be corrected.
Those issues could be avoided to some extend if the trust deeds were drawn at the outset having regard to the need for an easy transition in the event of the death of the appointor.
For advice relating to estate planning and trust deeds, contact Peter Muller at peterm@qbmlaw.com.au
