Because you do not own any of the assets which are held in your family trust, you cannot dispose of them in your Will (see Information Notes – Succession Planning for Family Trusts). For estate planning purposes, assets of any family trust must therefore be addressed separately from the assets of your estate.
For succession planning, the issue becomes one of passing the willmaker’s control over the family trust to ensure (as far as practicable) that the willmaker’s testamentary wishes are carried out after death. Control however, is an absolute concept and is not able to be divided amongst children with the same degree of certainty as applies to estate assets.
In the case of family trusts, the question of who controls the trustee and how that control is exercised is critical. The trustee of a family trust has an absolute and unfettered discretion as to how trust income and capital are distributed amongst the beneficiaries. In the case of a family trust with a corporate trustee (the usual case), whoever controls the trustee company effectively controls the making of distributions. In a company, control is exercised by the board of directors. Decisions of the board are taken by majority vote of the directors in attendance at a directors meeting. It would be possible therefore for the majority of the board in some circumstances to legitimately determine to distribute all the income and all the capital to themselves, to the exclusion of all other family members. If, for example, the board comprised 3 adult children of the willmaker, it would be possible that one child could effectively be excluded from all or most of the trust distributions, when the parents would have intended those distributions to be made equally between all children.
A satisfactory resolution of the control issue may vary with each case. The use of Protector provisions when passing control of the family trust to the next generation is one of the options available which may be discussed with you in conference. The information set out below will assist you in addressing the relevant issues.
What is a Protector?
The role or office of a “Protector” in discretionary trusts is well established. In essence, it involves a person or persons whose consent is required before certain decisions can be taken by the trustee of the family trust.
In many deeds there may already be person or persons called the “Guardian” who exercise a form of “consent” power. That office often operates in conjunction with the power to remove and replace the trustee (exercised by the “Appointor” – see Information Notes – “Appointors and Guardians”). “Guardian” provisions are usually not suitable for continued operation once control of the family trust is to pass to the next generation. In those circumstances, the required “consent” provisions become more complex.
To avoid any confusion with any existing “Guardian” powers, we have adopted the traditional trust term “Protector ”to describe the provisions which oversee the exercise of control of the family trust once the parents have passed away and control passes to the children. Those provisions and their function are discussed below.
Passing control of a discretionary trust
The essential feature of a discretionary family trust is that the trustee has an absolute discretion as to how the benefits of trust income and capital are to be shared. Where the trustee is a company, those decisions are made by the board of directors. For so long as the board comprises only the parents, the issue of determining who benefits and in what proportions is usually a relatively straight-forward exercise. However, once control of the board of directors passes to adult children, the possibility of disagreements or exclusions arising must be considered and appropriate alternatives addressed.