This is the fourth article in a series of eight about leaving family wealth to the next generation(s). The other Articles are entitled:
- Why you should make a Will?
- Why create a trust?
- Types of trust and who’s involved
- Trusts and passing on the family business
- Powers of Attorney and family wealth
- Trusts and Forced Heirship
- Protectors, the ups and downs
So you’ve done a Will and having thought long and hard you have now made the decision that having a family discretionary trust to transfer and protect wealth for the future generations is a good idea; not least as it will allow for the flexibility you are seeking to address the unexpected and as is said on occasion the “unknown unknowns”.
Having made the decision to establish a trust you have also addressed the preliminary questions associated with its creation, namely:
- Where is the trust going to be established?
- What is going to be put into the trust?
- Who is going to put, i.e. gift, what is going to be put into the trust?
- Who is going to act as trustee(s)?
- Is there to be a protector(s) appointed and what function is he/she or it going to fulfil?
- Who is going to benefit from the trust?
- How are the trustees going to know why you set up the trust and the reason(s) for doing so?
Over the years you and the family have prospered. The family business, a trading company that you established with your wife, has done well and of your four children, you are happy that two work with you in the business and the other two have successful careers elsewhere. Your intention is to leave the family business to the two children who work in it and to ensure that your other children receive, to the extent this is possible, an amount equal to the value of shares in the company at the date of the demise of the survivor of you and your wife.
Most people who decide to establish a family trust, i.e. the settlor(s), do so with a view that it will benefit all the parties they want it to benefit and that those are to benefit may receive what is intended by a certain age or the happening of a given event. This is usually expressed by the settlor(s) to the trustee(s) through a Letter or Memorandum of Wishes.
The circumstances as outlined are not unusual. The trustees will look at what has happened in the Wills and/or the trust and seek to “balance up” in monetary terms the inheritance that each of the children is to receive. This is a lot easier and indeed is more readily achievable if the trust holds shares in the family company.
However and prior to any reckoning that takes place the trustees may, having regard to any wishes of the settlor(s), have appointed funds or provided benefits to one or more of the trust’s beneficiaries. In most cases these pass without issue, but it is not uncommon for disagreements to arise between siblings where one has received more of a benefit from the trust than another (normally for very good reasons) and for such a difference in benefits to also be associated with more professional fees; such as a beneficiary living in an overseas country and the trustee(s) having to seek advice as to the tax and/or legal effects for the beneficiary concerned receiving an appointment of funds from the trust compared to say a loan.
Angst between siblings also comes about because of different needs and expectations which as we all know change as time progresses.
So at some stage it may be necessary or desirable for the trustee(s) to consider:
- Creating a sub-trust/fund for each of the prime beneficiaries of the trust; or
- Appointing funds from what is known on occasion as the “master trust” to new trusts which benefit each of the prime beneficiaries and their respective families.
A sub-trust/fund is usually created by the trustees executing a deed of variation to the trust deed declaring that a proportion of the overall assets of the trust will be held for the benefit of a particular beneficiary and his/her family. The sub-trust is still however part of the master trust and some interesting tax consequences can arise where one sub-trust makes a gain on the disposal of say a property and an appointment is made from another sub-trust in which no income or gains may have arisen. This is not a desirable situation.
Where the trustee(s) of a master trust appoint funds to be held on “the trusts [provisions] of a new trust”, they create new settlements and the master trust and the new trust(s) are totally independent of each other.
So in this particular case and a lot will depend upon what is being put into the trust initially, it may be that:
- Only one trust is established; or
- One trust is established initially and a decision as to whether one or more new trusts are created can be made at a later date; or
- Having regard to what is being put into trust two or more trusts are established at the outset and the assets placed in each trust are “balanced up”, to the extent they need to be.
The question raised on occasion is what happens if there are say two trusts and they benefit two children and one dies with that child not having married or had any children of his/her own. This is not an issue, sometimes the trust can then benefit the settlor(s) (assuming they would not be a beneficiary otherwise) or other family members (external to the immediate family) or, as is more usually the case, the other child and his/her family then become able to benefit from the trust.
So whether having decided to establish a family trust you actually end up with two or even more trusts very much depends upon personal circumstances.
If you would like to know more about the points raised in this Article then please contact me or one of my colleagues at Fulcrum Limited