What is a Discretionary Trust / Family Trust?
A trust is a legal relationship where one person (the “trustee”) holds assets for the benefit of one or more third parties (the “beneficiaries”).
A family or discretionary trust is a trust in which the trustee is given the power/discretion to decide which of the beneficiaries are to benefit from the trust. It can help protect family assets and enable income and capital to be spread among members of a family. It is usually established by a small gift (e.g. $10) made by a person, who is called the settlor. After the initial settlement by the settlor, most of the trust property (i.e. trust fund) usually comes from gifts or loans made by the person who wished to establish the trust (who is generally also a beneficiary of the trust) (the “principal”).
Although most of the assets of the trust may have been provided by the principal and he or she may control the trustee and therefore the trust, those assets are trust assets. Once they become trust assets they cease to be assets of the principal and cannot be dealt with in the principal’s Will, however the principal may prepare a Memorandum of Wishes (see below) giving direction to the trustee of the trust as to how the principal wishes for the trust to be administered and trust assets dealt with after the principal’s death. The power of appointment (i.e. the appointor) can be dealt with under a person’s Will.
The tax, stamp duty and estate planning implications for the beneficiaries of the trust structure and decisions of the trustee need to be carefully considered and the principal and/or trustee may wish to seek accounting, tax and legal advice on these matters.
A trust deed is a document that sets out the terms and conditions on which a trust is established, how it must operate and how the trust is to be terminated (or wound up). The trust fund is held by the trustee and administered in accordance with the terms of the trust deed.
A trust continues after it is established for such period as specified in the trust deed up to a maximum period specified by law (usually 80 years), unless the trust assets are distributed earlier to the beneficiaries and the trust is terminated (or wound up).
When a trust is established and the trustee is to be a company then the directors of the company must hold a meeting to accept the company’s appointment as trustee of the trust and to sign the trust deed. The original trust deed signed by the settlor of the trust must be tabled at this meeting of directors. The minutes provide documentary evidence of the meeting and record what happens at the meeting.
Memorandum of Wishes
A Memorandum of Wishes is a document prepared by the person who creates a family trust or transfers assets to a family trust (i.e. generally the principal beneficiary of the trust upon whose instructions the trust was established) which gives guidance to the trustee of the trust by expressing the person’s wishes and intentions in relation to the distribution of income and capital of the trust, which wishes and intentions are not set out in the trust deed.
A Memorandum of Wishes should be prepared at the same time as the trust deed, but may also be prepared at a later date or updated from time to time when the wishes and/or intentions in relation to distributions of income and capital of the trust change.
Deed Appointing a New Trustee and Minutes
When an existing trustee of a Trust resigns/retires or the Appointor of the Trust (i.e. the person who is the ultimate controller of the trust) determines that the existing trustee should be replaced with a new trustee then the trust deed of the trust generally provides that it can be amended by way of deed pursuant to which the existing trustee is removed and a new trustee is appointed.
If the new trustee is an individual then thedeed appointing a new trustee must be signed by that individual. However, if the new trustee is a company then the deed appointing a new trustee must be tabled at a meeting of directors of the company at which the directors must resolve to accept the appointment of the company as the new trustee of the trust and sign the deed. Minutes of that meeting must be prepared recording the resolution of the company to accept the appointment as trustee and sign the deed.