Family Trusts and Disputes: Protecting Your Legacy

The recent high-profile case involving the Murdoch family trust in the US is a stark reminder of the potential for family trust disputes to escalate dramatically. While the Murdoch case has played out in the public eye, there are scores of similar legal disputes behind closed doors. In fact, the number of legal disputes has exploded over the past decade as baby boomers start to bequeath their wealth.

Poorly drafted trust deeds are responsible for countless family feuds, with some taking many years and millions of dollars to resolve.

It underscores the importance of clear communication, meticulous documentation and regular reviews of trust structures to ensure they continue to serve their intended purpose.

So let’s look at what a trust is and how you can protect yourself, your estate and your loved ones.

What is a family or discretionary trust?

Discretionary or family trusts are primarily used for tax purposes, whereby income can be distributed to different beneficiaries on lower marginal tax rates.

These trusts are known as discretionary trusts because the trustee has the power to allocate trust capital and income at their discretion. They also offer certain asset protection benefits and succession planning options.

Who manages a trust?  

The management of a family trust typically involves a trustee and an appointer. The trustee manages the day-to-day running of the trust and can make decisions on how to allocate assets. However, the most important role is the appointer, who is the ultimate controller of the trust and has the power to remove or appoint trustees – including themselves.

The conditions and rules governing the creation and management of the trust are set out in a legal document known as the trust deed.

How important is the trust deed? 

The trust deed is crucial as it essentially governs the trust. It is critical that the deed and all associated estate planning documents are carefully drafted – and regularly reviewed.

Why should you review your trust deed regularly?

Regular reviews of trust deeds and estate planning documents are crucial for several reasons:

• Changing family dynamics: As highlighted in recent case law, family relationships can evolve through time, potentially impacting the effectiveness and fairness of existing trust structures.
• Legislative changes: Tax laws and regulations surrounding trusts are subject to frequent updates. Regular reviews ensure the trust maintains compliance and optimal tax efficiency.
• Evolving financial circumstances: As financial goals and objectives change, trust structures should be adapted accordingly.
• Risk mitigation: Well-crafted documents can help mitigate the risk of future disputes among beneficiaries.

What should you consider when reviewing a trust deed?

When reviewing trust deeds and associated documents, several aspects should be considered:

• Avoiding off-the-shelf trust deeds: Most families require specialised legal, financial and accounting advice to tailor the terms to their specific needs. Off-the-shelf deeds may leave you open to unintended consequences.
• Reviewing appointer powers: Understand who the current and successor appointers are and their specific powers, ensuring they remain aligned with your goals, values and intentions.
• Revisiting trustee obligations: Ensure the trust deed clearly outlines the trustee's obligations and that these responsibilities can be adhered to.
• Maintaining detailed records: Maintain detailed records of all trust decisions, transactions and communications. This documentation can demonstrate that the trustee is impartially and transparently fulfilling their fiduciary duties to the beneficiaries.
• Updating beneficiary definitions: Update the list of beneficiaries to reflect current family structures and intentions. This is particularly important in cases of blended families or estranged relationships. As part of this, certain individuals can be specifically excluded if required.
• Reviewing distribution clauses: Examine distribution clauses to ensure they align with your current wishes and provide sufficient flexibility for tax-effective distributions. Ensure historical distributions are fully documented as failure to do so can have tax consequences.
• Knowing your vesting date: The vesting date, when the trust is due to end, is typically when the assets are given to the beneficiaries. This can create tax liabilities and leave the trust open to attack, so it’s important to be prepared.
• Including comprehensive variation powers: Include a comprehensive variation power in the trust deed, allowing for future amendments to adapt to changing financial circumstances or legislation. Ensure the variation process is clearly defined and followed meticulously.
• Incorporating succession plans: Incorporate clear provisions for the succession of control, including the appointment of new trustees and appointors. This helps prevent disputes over future control of the trust.
• Scheduling family meetings: Transparent and early communication is key. By discussing the issues and clarifying any misunderstandings, you can deal with any problems and ensure everyone is on the same page.
• Creating a family constitution: An extension of the family meeting might involve the creation of a family constitution – a legal document setting out the values, principles and defining objectives of the family and how decisions will be made. Each family member then signs this document, which can be referred to in the event of disagreement.
• Seeking professional advice: Seek expert legal and financial advice to scrutinise every aspect of the trust and identify any weaknesses or vulnerabilities.

Holistic financial and legal advice is key

In light of the complexities surrounding family trusts and the potential for disputes, families must regularly review their trust deeds and associated estate planning documents. By doing so, they can ensure that these crucial structures continue to align with their current wishes, comply with evolving legislation and effectively support their broader financial goals.

With the introduction of Apt Wealth Legal Services, Apt brings together comprehensive, integrated advice that spans financial planning, legal considerations and tax structuring. With a holistic approach and both services under one roof, Apt clients can navigate the complexities of estate and succession planning, ensuring their legacy is protected and passed to future generations.

Find out more and book your free consultation at www.aptwealthlegal.com.au.

General Advice warning

The information provided in this blog does not constitute financial product advice. The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. Apt Wealth Partners (AFSL and ACL 436121 ABN 49 159 583 847) and Apt Wealth Home Loans (powered by Smartline ACL 385325) recommends that you obtain professional advice before making any decision in relation to your particular requirements or circumstances.