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Discretionary Trusts: Protect Your Family Wealth

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When setting up a business, many prospective owners will be advised by their Accountants to operate through a discretionary trust structure as this allows flexibility in income splitting whilst also providing asset protection.

Whilst this is a common strategy for family run businesses, it is important to be aware of the complications that may arise.

If you are involved in a business structure, which has as part of that structure a discretionary trust, you should be aware of the possible issues relating to the structure of that trust. These could include:

1. Your trust should reflect the succession planning

Whether the trust properly reflects the succession planning that you might have in relation to ongoing control of the trust in terms of being an appointer and/or trustee. In other words, do you need to appoint a succeeding appointer and/or consider appointing succeeding guardians?

2. To add or exclude beneficiaries to the trust

An exclusion may include:

  • Sons in law or daughters in law who are likely to be involved in a matrimonial dispute and who may make a claim against their husband or wife who may well be beneficiaries of the trust. It may be argued that their husband or wife has an asset in the form of being a beneficiary in a family trust and have an entitlement to expect a distribution if in fact they do not already have a loan account there.

3. When does the trust vest?

You may care to consider either attempting to accelerate the vesting date or pushing back the date of vesting depending upon tax consequences and the family dynamics.

  • This becomes a significant and important issue because if the vesting date of a trust is reached the assets of the trust will vest according to the trust deed and this may bring about a result which is not what either the trustee or the appointer necessarily want.
  • If the trust does vest then the beneficiaries have a fixed and final entitlement to the assets of the trust pursuant to the trust deed. Similarly, if a trust distribution is not made by 30 June each year by the trustee then there will almost certainly be default beneficiaries who will be entitled to receive the distribution.

4. Is the trustee the appropriate person entity to manage the trust?

It is important that anybody involved in the management or operation of a family trust receives ongoing advice as to the management of the family trust and the trust deed. In particular, any person controlling or managing a family trust ought to ensure that the “state of health” of the trust is such that it continues to function as and how they intended, and that it will do so going forward. The advice sought might include taxation advice, succession planning advice and family law advice.

If you would like us to put you in contact with the right person, contact your Ledge Finance Executive direct, or contact us here and we will be happy to assist.

The information contained in this article is of a general nature and is not intended to be nor should be considered as professional advice. You should not act on the basis of anything contained in this report without first obtaining specific professional advice.

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