When making a will it is important to understand that you can only give what is yours. Assets owned via a family discretionary trust structure cannot be gifted directly in a will.
If some or all of a will maker’s assets are owned through a trust, the will maker does not own the trust assets. This is the case even if the will maker is the trustee of the trust. So how does the will maker deal with the trust assets in his or her will? This is where your lawyers come in handy. They help ensure that you pass on to your loved ones assets that you either own or control, intact, with minimum tax impost and maximum ease of transition.
What is a trust?
A trust is a legal structure not a legal entity. The trust creates a protective structure for tax effective asset ownership. A trust may be set up to run a family business or to hold investment assets such as property or shares. A trust enables the trustee to distribute the income from the trust assets to beneficiaries (usually family members) in the most tax effective way. The trustee is the legal entity that owns the trust assets on behalf of the beneficiaries. The trustee thereby has control of the trust assets.
With a trust it is who/what has control of the trust assets that is important. The trustee has the right to control trust assets. A will maker therefore must look to how that control can be passed on. The Trust Deed will reveal where control of the trust assets lies.
Will Maker as Trustee:
If a will maker has assets in a trust the will maker will often be the trustee of the trust. If the will maker is the trustee he can nominate a replacement. In this way he knows that ongoing distribution of trust income and assets will be with someone who he knows will carry out his wishes.
The relevant trust may also have an ‘appointor’. The appointor has the highest level of control. Appointors can hire and fire the trustee. There will usually be a clause in the trust deed conferring a right on the appointor to appoint in their will a replacement appointor. Sometimes an appointor is also the trustee. If a will maker is an appointor he can appoint someone in his will to take his place as appointor. The will maker thereby passes control of the trust assets to the new appointor.
Proprietary Limited Company as Trustee:
The trustee of the will maker’s trust may alternatively be a proprietary limited company in which the will maker owns shares. Ownership of shares gives the will maker the right to act as director of the company. In his role as director the will maker can make decisions as to the distribution of income from the trust or the actual trust assets.
If the trustee is a Pty Ltd company control of the trust assets lies in the shares. The will maker can gift his shares to anyone and therefore effectively pass on control of the trust assets in his will.
In both situations the will maker only has the right to control the trust (and therefore the trust assets). It is vital to ensure that control of family discretionary trusts is appropriately passed on to the will maker’s beneficiaries.
For further information please contact Emma on 8362 6400 or email Emma Marinucci. Join our mailing list to receive updates and advice on current issues.