Family-run businesses commonly use trusts for a few reasons:
- As a way of protecting personal assets;
- For the various tax benefits that trusts incur; and
- To keep the business ‘in the family’ for future generations.
However, it is important to remember that trusts can be extremely complex and can have a number of detrimental consequences if not coordinated properly, especially when there is disagreement amongst members of a family.
What common problems arise in a family business?
Every business is different, and every family is very different, and so it is understandable that every family trust will have its own unique issues and challenges. A common issue that arises in family business and trusts are disagreements amongst the beneficiaries in relation to interest payments, and between beneficiaries and the trustees of the trust.
As much, even it seems unthinkable at the time, it is also important to consider what to do in the event of divorce, because it happens. You don’t want an ex-spouse or greedy son-in-law taking control over your family business or retrieving substantial income as a beneficiary of the trust. A popular example is Gina Rinehart’s very public dispute with her four children, which was a classic battle over ‘who gets what’. While there may not be many billions of dollars involved, it is prudent to consider the disagreements that third parties may have with you and the operation of your discretionary trust.
The trust deed
The deed is the legal instrument that sets up the discretionary trust. It outlines the responsibilities of each party, namely the trustee(s) and beneficiaries, as well as the terms that detail the operation of the trust. A discretionary trust deed protects family assets and enables income and capital to be spread amongst the members of a family.
Trust deeds are complex and, if not drafted properly, may not reflect your best interests in the long term, or protect your family when you have shuffled off. Trust deeds have an 80-year life span unless the trust is terminated prior to its expiration date. If it hasn’t, however, it is reasonable to assume that in that time your family will have grown exponentially in size, and you may come into disagreement with multiple feuding grandchildren vying for a share of the family business.
In order to avoid disagreements with third parties and legal battles that may evolve from these, the trust structure and trustee obligations need to be carefully considered and enshrined within the trust deed. You may wish to seek accounting, tax and legal advice on these matters.
Having an appointer
Every trust needs an appointer – the person who appoints the trustee(s).
Trusts have a default succession provision stating that, in the event that the appointer dies, his/her personal representative or the executors of the estate will step into their shoes. A spouse is usually the default appointer but you need to be careful that they don’t gain control of significant assets in the trust if you don’t want them to. Say, for example, you have three children, and one disagrees with the other two. Since decisions must be unanimous, a family business lawyer or accountant is given appointer powers with the ability to cast a deciding vote. OR if disagreement is still rife, and a common sense decision cannot be reached, you can resort to the courts to make a final decision.
Do I need a will?
In the event of death or incapacity, it is extremely important to have a will in place, in order to avoid disagreements amongst beneficiaries, and as to whom the responsibilities of the trust will lie, in order to protect the hard work you have put into your family business. As the principal (creator of the trust), you may wish instead to prepare a Memorandum of Wishes, giving direction to the trustee of the trust as to how you want the trust to be administered and trust assets dealt with after your death.
Most of the disputes over family trusts are driven by personal issues, family feuds etc, so it’s important to get some guidance from lawyers whose job is to offer objective and unbiased advice.