Estate planning – wills & family trusts

Geoff and Janet are “baby boomers” who have accumulated substantial assets in their own names. They also have a family discretionary trust which holds two investment properties and a ski flat. The trust has a corporate trustee.

They made their wills 20 years ago, leaving everything to each other and then to their three children equally. The children are now all adults.

Geoff and Janet believe that the trust assets are “really theirs” and that their Wills will  deal with those assets upon their deaths.

Sadly, Geoff and Janet are mistaken in that belief. Their “interest” in the family trust is limited to being a mere expectancy and cannot be dealt with in their Wills.

The view that the assets are “really theirs” arises from the fact that Geoff and Janet own and control the company which acts as trustee of the trust. More particularly, they control the board of directors. The board makes the decisions as to which beneficiaries are entitled to receive the trust income each year and which beneficiaries will receive the trust capital on any distribution.

Passing control of a family trust on death requires careful attention in the Will-making process. Dividing control amongst three children is a considerably more difficult task than simply dividing up the parents’ estates.

Common strategies that do not go far enough

 1.      Leave the shares in the trustee company to the children.
A good start, but not enough. There is no certainty that each child will be represented on the board of directors, which is the decision-making organ of the company.

  1. Make each of the children a director, effective on the death of both parents.
    Better, but still not enough. Two children can resolve to distribute a greater proportion (or all) of the assets to themselves, to the exclusion of the third. (Tyranny of the majority.)
  2. Make each of the children a director, effective on the death of both parents and require unanimous resolutions.
    Still no cigar. This can create a reverse problem to the tyranny of the majority. One child can hold the others to ransom to have resolutions passed – e.g. refuse to agree to a distribution unless he or she gets more than a one-third share. (Tyranny of the minority). (To suggest that the child concerned would not do such a thing because that child would also suffer is to badly misunderstand sibling conduct in these types of disputes.) 
  3. Make all three children joint Appointors.
    Sounds good, but in most cases will not get you home. The effectiveness of this step depends on the drafting of the deed and the Appointors’ powers. In most deeds, the Appointor simply has the power to replace the trustee. This prevents an unacceptable new trustee being appointed. However it is of little use if the problem lies within the existing trustee. In that case, if the concern is to prevent tyranny of the majority, the majority won’t allow the power to be used. The same would apply to the tyranny of the minority. Of itself therefore, it will usually not be sufficient.
  4. Require the children as estate trustees to hold the shares in the trustee company and in that capacity to deal with the trust assets in the same way as the residuary estate.
    A good “fall back” position in some cases, but in the final analysis it is not binding and therefore cannot be relied upon. The trustee of a discretionary trust cannot fetter its discretion. Any purported binding testamentary obligations imposed on the directors of the trustee of the family trust will therefore be treated, at best, as a non-binding expression of wishes by the Will-maker.
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