Family Trusts – Protecting your Assets from Predators

A trust is a legal obligation created by a person (the Settlor) who passes assets to the control of another person (the Trustee) for the benefit of a third person/s (the Beneficiary/ies).

They are less important today as a number of Trusts have been overturned nor do they provide the tax benefits as much as they used to.  Assets held in a Trust are taxed at 33% unless they are paid out to a Beneficiary when the asset would be taxed at that individual’s tax rate[1].

One of the biggest mistakes people can make is to ask a friend or family member who has no experience or knowledge of their obligations and liabilities as a trustee.

Another major mistake is not keeping proper records.  Annual meetings need to be held.  Resolutions must be minuted.  The Trust must have a separate bank account.  All of these factors could contribute to a Trust being deemed a Sham Trust consequently being invalidated so that ultimately there was never any protection for the assets belonging to the Settlor/s.

The major advantage is that a Trust is a Living Will and your wishes can carry on after your death.  Wills can be contested but a robust Trust cannot.
History of Trusts
In feudal England the King awarded land to knights returning from battle.  The knights would establish their estates, only to face the danger of their lay-about sons squandering their inheritances.  To prevent this, and to protect other family members, the family patriarchs would bequeath their lands to their fellow knights to hold in trust for the benefit of the family.  Little has changed in the last 800 years.
The Settlor
The person setting up the Trust is called the Settlor.  This is either the person with the assets that are being gifted to the Trust, a professional adviser or a close family friend.  The Settlor can be one, two or more people who own the assets.   The Settlor can have a range of duties which are described in the Trust Deed.  In most trusts the Settlor is simply the person who sets up the Trust and then has no other important powers.
The Trustees
Trustees are effectively the policemen, or referees, of the Trust.  They are responsible for ensuring that the instructions in the Trust Deed are correctly followed.  The Trustees usually own the assets that have been transferred into the Trust.  A Trustee effectively controls the administration of the Trust, hence, he or she has a degree of control over the original assets.  Most Trusts have two or more Trustees.

There is a constant debate within the legal profession about the number of Trustees a trust should have.  From a purely legal perspective, you could get away with having just one Trustee.  We believe it is acceptable to have two Trustees to administer a simple Discretionary Trust.  They would usually be the two individuals (partners) whose assets have been transferred into the Trust.
The Beneficiaries
The beneficiaries are the individuals who will benefit from the Trust.  They will normally do so entirely at the Trustees’ discretion.  No discretionary beneficiary can force the Trustees to make any payment to them.  Trust are created in order to provide maximum flexibility to cater for changing circumstances.  The Trust Dee usually lists a multitude of beneficiaries who may be current living individuals, or individuals yet to be born.
Memorandum of Wishes
The Trustees have a duty to follow the wishes of the Settlor in the Memorandum off Wishes.  This is not a legal document but a guide to new Trustees on how the assets should be managed, protected and distributed after your death.  The Memorandum of Wishes records whom you would like to be appointed as a new Trustee if you become disabled or die.

Your Memorandum of Wishes should be regularly updated as your wishes and desires change.  You do not need to have a lawyer to assist you to make changes to it and it doesn’t have to be legally precise because it is only a guide to the trustees.  It needs to be clear and easy to understand.  Your Memorandum of Wishes is designed to give guidance to the well ad surviving Trustees of your Trust.
The Trust Deed
The Trust Deed is the set off rules by which the Trust is operated.  It should reflect the wishes of those establishing the Trust and it should be worded so that it is easy to understand.  The Trust Deed needs to be carefully drafted so that it will provide maximum flexibility and cater for any eventualities which may occur.
How will your Discretionary Family Trust work?
You establish a Family Trust and then open a Family Trust bank account.  You will then decide which assets you want to transfer into the Trust.  You may wish to place your house, rental properties[2], business/es and investment portfolios into the Trust.
The assets need to be valued.  A Deed of Acknowledgement of Debt must be prepared which states which assets (and the value of them) have been transferred to the Trust.  These assets would then be registered in the name of the Trust and you would have an interest free loan from yourself to the Trust.   Once the debt has been forgiven the transferred assets will be protected from predators and creditors.

At any time Trustees of a Family Trust can distribute money to beneficiaries.  You may be both a Trustee and a Beneficiary.

[1] Discuss your options with your accountant and/or lawyer.
[2] discuss your options with a professional and consider the benefits and disadvantages of owning property in your own name, a Look Through Company (LTC), or a Discretionary FamilyTrust.