Who has ultimate control of a discretionary trust?

A trust is a relationship where one holds property (or other rights) on behalf of another. A trust is discretionary where the trustee(s) have an ability to choose whom of a class of beneficiaries will receive the income and/or the assets of the trust. This discretion has tax and protective benefits, but can be problematic if the power falls into the wrong hands. For example, a trustee may have the power to distribute everything to him/herself, leaving nothing for the other beneficiaries, nor any recourse for them to challenge the distribution.

The choice of the right trustee(s) is important. You cannot spell “trustee” without “trust”. Sometimes requiring two or more trustees acts as a check and balance, as does sometimes having a trust guardian. Personal trustees will from time to time die or resign their role. In many cases, having a corporate trustee – a Pty Ltd company with no assets that just functions as the trustee is desirable. A company lives on even if a director or shareholder dies. Having a company also ensures the trustee and the main beneficiaries are at arm’s length.

With a corporate trustee, the directors make decisions including distributions, in accordance with the company rules. If directors die, resign or need to be removed, the shareholders have the power to hire and fire directors. So the shareholders have the ultimate control as compared to the directors. When the usually $1 shares are left under a will, care needs to be taken with estate planning to ensure the shareholding is bequeathed as the testator intended, and the shares, and thus the control, does not fall into one person’s hands to the exclusion of others.

Just like the shareholders choose the directors of a company, the appointor of a trust has the power to appoint and remove trustees. This includes removing a corporate trustee. Thus the ultimate control of a trust in fact lies with the appointor, and this is even more important than the shareholders of a corporate trustee. When doing estate planning, care needs to be taken to consider the trust deed, and any amending deeds, to see what the rules are about the power of the appointor, especially what occurs if the appointor dies. This can vary considerably from deed to deed. Sometimes, the appointor can appoint a successor appointor in their will, but not always. If a trust deed gets lost, it can cause all sorts of problems, so ensure you keep the original and copies safe, and send a copy to your accountant and your solicitor, including electronic copies.

Trusts are a fantastic mechanism to provide security and tax benefits for families and businesses but can become tricky if they need to be untangled. Like many things in law and life, prevention is better than cure (and is much cheaper too). Contact our expert trusts and estate planning team to discuss how we can assist.

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