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The notion of having a Family Trust is viewed by many as too complicated, prone to high risk, a facilitator of family disputes and with little to ultimately gain in financial terms.

There have also been a number of high profile cases in the public domain of Family Trusts that have not been set up or managed properly, at times leading to significant tax penalties and family disputes for those involved.

However, it need not be that way.

For those who set a Family Trust properly , it is considered one of the best legal tools to help better distribute the wealth of the family and make substantial tax savings at the same time.

And in times of separation, family disunity or conflicts, a Family Trust can also play a vital role in the protection of assets.

In Part 1 of this Article we explained what a family trust is and its advantages.

PART 2

In this section we will look at some practical aspects of setting up the trust, including a look at the tool box required to set up a family trust, and the potential pitfalls and how they can be avoided.

Tool Kit & Pitfalls

In this section we will look at the method in which one could set up the family trust. Before meeting your legal advisor and financial planner, it is important to have all the information necessary for them to help you structure it well. These may include;

• –          The names of the family members, their age and addresses
• –          Who would be the Settlor(s) and who would be the trustees
• –          The property and the value of property used to  intestate the trust
• –          What is the mechanism of managing the trust, who appoints  the trustees, who can remove them, what specific rights do they have
• –          If establishing a bank account under the trust, who has the signing authority
• –          Whom would you like to appoint as accountants and auditors of the trust
• –          In the event there are many members some prefer to have a secretary to call meetings and take care of administrative matters
• –          When should the family trust take effect, when would it cease to exist and how the property will be vested thereby.

It is very important that trustees be actively involved in the running of a trust.  Trustees must be involved in all decision-making, record decisions and prepare annual financial statements.  Trusts must have a formal written trust deed with a separate bank account.

Needless to say, it is difficult to assess the amount of money you require as administrative fee as it depends on the variables such as the institutions you hire for accounting and financial advice, number of members etc. However, a simple family trust can cost around $800 to $1000 per year to maintain.  This cost includes accounting costs and financial advice for significant financial decisions.

Now that we have discussed the advantages and how it is formed. As said earlier, the ice can be thin and one needs to be aware of the thinner spots. Here are some points to ponder before you rush into a decision;

a)     What happens on the vesting date of the Trust ?

The family trust has a time period usually 80 years. This is a ticking time bomb.¹

Many trustees and beneficiaries may forget this and as a result not many people plan for this eventuality.

The Settlor also may have died by then. As you can imagine, in the event of a substantially wealthy trust it means that there will be lump sum which will be distributed to the beneficiaries. Thereafter, the property is not Trust property anymore, they are personal property. Hence, the protection and advantages will be lost. If you prefer to re-create a family trust beware these lead to a series of transactions and could no doubt give rise to Capital Gains Tax concerns.

As done in the high profile cases between Mrs. Gina Rineheart and the beneficiaries to her father’s trust the Trustee has the right to apply to the Courts and extend the date of vesting. ²

However, it is important to consider the views of the Beneficiaries in order to make sure that the Trustee will not be exposed to litigation for taking an arbitrary step against the best interest of the beneficiaries.

Therefore, it is better to discuss this in advance with your solicitor, accountant or financial planner.

b)     Is choosing the correct Trustee more important than choosing the trust property?

The word ‘trust’ itself denotes that trustworthiness is paramount. There was a recent interesting NSW judgement which illustrates the importance of choosing the correct trustee which I wish to discuss in considerable detail. ³

Dr. Richard Tijong a surgeon and a lawyer executed a Will for his brother Dr. George Tijong for his assets leaving them for himself, Dr. George’s wife and child.

After the death of Dr. George, his brother Richard advised that the assets should be maintained through a family trust as per the Will and the entirety of the estate was vested in the family trust and a company where all three of them (Richard, George’s wife and child) were directors became the trustees.

Later, using the powers vested in the Deed of Trust, Richard replaced himself as the sole trustee and thereafter the Trust received several claims for medical negligence against George.

Richard continued to pay these claims which turned out to be bogus claims whereby Richard attempted to siphon out the funds to himself. Eventually, the Courts decided in favour of the Widow and Child but this gives a good example of how important it is to carefully draft the right to  appoint and remove trustees as they have the power to deal with  Trust property.

c)     How to invest trust property ?

Many family trusts are formed by family members and seldom go beyond that in terms of getting help in their affairs. It is vital that trust property is invested in the correct manner. As per section 14 of the Trustee Act (1925) ⁴ a trustee may, unless expressly forbidden by the trust deed, invest trust funds in any form of investment. Hence, it may be best to get advice from a professional financial planner or investment manager as to how  trust property should be invested. ⁵

d)     Too many changes could causes havoc

Trusts generally go through changes at different intervals depending on the situation of the Trustees / Beneficiaries and also the changes in the law. To accommodate these changes your solicitor and financial advisor may request you to amend the Trust Deed.

Although this may be the correct advice to get over an immediate concern, it is paramount to consider how it affects the validity of the Trust.There are instances where the tax authorities could determine a change of the Trust Deed as “resettlement of the trust” for tax purposes.⁶

This will no doubt create a huge unexpected tax liability which needs to be borne in mind. Although it is difficult to predict all instances where this could happen, a common examples may include where there is a complete change to the number of beneficiaries (although within same family), changing the date of vesting etc. Hence, it is wiser to discuss the impact on taxation with your advisors before you consider stop gap measures.

e)     Assessing wealth for social security payments?

For certain social security payments though Centreline, the Centrelink may request an asset statement to assess the eligibility. In certain instances, it is possible for the authorities to attribute trust assets and income. In doing so the authorities generally apply what is called the ‘control test’ and the ‘source test’.

The control test considers whether the individual has the ability to dismiss and appoint the trustees, veto a trustee’s decision and amend the trust deed. It also looks at situations where an ‘associate’ controls the trust and an individual informally controls the associate. The source test, on the other hand, looks at who contributed the assets to the trust and whether that individual has control over the assets.

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Dinesh Munasinha

Online Legal Information Editor at Family Law Express

Dinesh is a lawyer with overseas experience currently completing the bridging course to be recognized as a lawyer in Australia. He has experience in successfully assisting individual as well as corporate clients in many areas of law. His strength is the ability to simplify complex legal issues, communicate effectively and find practical legal solutions for his clients.

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