Dealing with existing trusts in your will

Dealing with trusts in your will

How to deal with an existing trust in your will

Trusts can be set up during your lifetime to protect your assets, control the transfer of those assets, and distribute income tax effectively. Known as inter vivos trusts, they are most commonly used as family trusts, set up to hold assets for your family members as beneficiaries of the trust.

In many cases the fundamental objective of the trust is to give the beneficiaries certainty as to their entitlements and reduce the likelihood of family disputes. Therefore great care should be taken in deciding how you pass on control of the family trust in the event of your death.

It is important to be aware that family trusts operate as a separate legal entity. Therefore the assets under these trusts cannot form part of your estate. While you may not own these assets, your will can influence what happens to them.

Here are the key things to consider when setting up your will:

Who is the trustee?

The trustee is in charge of running the trust, with duties ranging from the allocation of income and capital to deciding when the trust can be wound up.

The trust deed will most likely set out how the trustee is replaced. This will depend on the type of trustee.

If you are the sole trustee, the executor you appoint in your will may become the trustee in the event of your death. This is something to be aware of when choosing your executor.

Alternatively, you may be joint-trustee with others (most likely family members). The trust deed will again set out how you will be replaced in the event of your death. For example, if one trustee dies the remaining trustees may continue as trustees of the trust. When the final trustee dies, the executor of their estate may become the trustee.

If the trustee is a company, the majority shareholder of the company will most likely control the position of trustee. This must be considered when you are deciding who will inherit your shares in that company under your will.

Who is the appointor?

The appointor plays an important role in the trust as they have power under the trust deed to remove and appoint the trustee. It is important to review the powers of the appointor in the trust deed, as they are often given the power to decide on the new appointor in their will (that is, the power of the appointor passes via their will).

If you are the appointor of a family trust, you may want your will to stipulate that either a trust beneficiary or an independent person will become appointor in the event of your death.

Who are the beneficiaries?

Beneficiaries of a trust receive distributions from the trust usually in the form of income or capital.

Income beneficiaries may receive distributions regularly throughout the life of the trust, while capital beneficiaries are likely to receive assets when the trust is wound up or at various times during the life of the trust. In many cases, beneficiaries are both.

If you set the trust up, it is important to be aware of who the beneficiaries of the trust are and what they are receiving as you may want people outside of the trust to receive an equal share of your overall assets in the event of your death.

You should take this into consideration when preparing your will. Review both the assets in the trust and those in the rest of your estate to ascertain the best way to distribute these assets fairly. Remember that beneficiaries have no absolute entitlement to any assets of the trust (unless the trust is a fixed trust such as a unit trust) and the power of distribution usually lies solely with the trustee.

Does the trust have debts?

At some point during the life of the trust, you may have deposited funds into the trust. This may be a loan from you to the trust, and if so is an asset under your will which your executor can call upon in the event of your death.

When setting up your will, you should review any loans you have given to the trust and try to avoid a situation arising where the trust has to sell off assets in order to settle the debt.

Alternatively, you may have borrowed money from the trust. This liability will have an impact on your estate and should be taken into account when preparing your will.

As with all areas of estate planning and will drafting, matters can become complex very quickly and seemingly minor oversights can have very large unintended consequences down the track. To get advice from expert estate planning lawyers, please call Certus Legal Group on 07 3106 3016 or contact us using the form on this page.

This article does not give legal advice and should not be relied upon as such. It is intended to provide general and summary information on legal topics, current at the time of first publication. You should seek professional legal advice before acting or relying on any of the content contained herein.