There are a number of important decisions that must be made when you’re considering establishing a family trust including deciding when to establish your trust, who should be the trustees and/or the beneficiaries and so on. These are discussed in more detail below.
The trust deed sets out the rules about how your trust is to be managed and who is to benefit. As it can often be difficult to change at a later time, the trust deed needs to be as flexible as possible, while at the same time reflecting your intentions in setting up the trust. Most modern trust deeds give the trustees power to make changes to the administration clauses. Either the trustees or a named appointer may be given power to add and remove beneficiaries. There is a limit to how far you can go in allowing major changes to a trust. If changes later prove necessary and there is no power to do this under the trust deed, it may be necessary to apply to the High Court which would be very expensive.
The trust deed will usually give a name for the trust. A distinctive name should be chosen that will help maintain the distinction between your own assets and those of the trust. There is no central register of trust names, so any name can be chosen within reason.
The name should be easily recognisable, for instance a name such as the Smith Family Trust may not stand out from the crowd. Many people are creative with the trust name and others prefer simplicity by using the family name such as the Tom & Jane Green Family Trust.
Trustees hold the title to trust assets in their own names and have the power, subject to the trust deed, to deal with those assets as they see fit. Trustees must:
Settlors can be both trustees and beneficiaries of their own trust.
The trust deed should give at least one person the power to appoint additional trustees and to remove any trustee from office. The settlor usually has this power of appointment and removal, and the settlor should be able to pass this power on to others while alive or by his or her Will.
If you are a trustee of your own trust, it’s recommended that an independent trustee is also appointed; this helps to protect the trust from claims that it is a sham.
The independent trustee could be, for example, a trusted friend or a professional advisor. Your lawyer can advise about setting up a company to act as a trustee. These should not be confused with the five statutorily recognised trustee organisations.
Setting up a company to be the trustee can have some advantages: the company will not retire, die or become mentally incapable. It also allows for a range of people (the directors are normally the partners or directors of the professional firm) to sign documents for the trust management company rather than relying on a single person who may be overseas or otherwise unavailable. However, there can be disadvantages with this arrangement and you need good legal advice before you decide to appoint such a company as trustee.
Independent trustees should not be able to benefit under the trust, so that they are truly independent. Trustees have personal liability for any losses the trust may incur. Independent trustees may have a liability limited to the assets of the trust, in order to limit any future claims against them, other than as a result of their own dishonesty or negligence.
Most trust deeds say who is to have power to appoint and remove trustees. Often this person is given a formal title such as appointer and is given power to hand on this role to someone else.
Some mechanism for replacement of trustees on death or incapacity is important. You should check what your deed says about the removal of any trustee, including the settlor, who no longer has mental capacity. The appointer may also be given power to appoint and remove beneficiaries.
Some trust deeds provide for a protector to be appointed. Protectors are not trustees, but their approval is required for a range of important decisions such as capital or income distributions, or variations to the trust deed. Protectors don’t need to be involved with the trust on a day-to-day basis or to sign documents such as bank loan and security documents.
This arrangement simplifies the administration of the trust but retains the involvement of an independent person in major trustee decisions.
It’s also possible to appoint an advisory trustee to work with the trustees. As with the role of protector, this role can be restricted to specific trust assets. The law gives trustees protection if they act in reliance on advice from an advisory trustee.
Appointing an advisory trustee can be a good way to make use of the knowledge or experience of a family member or friend, or to involve someone from the wider family group.
Anybody can be a beneficiary of a trust. The most common groups of beneficiaries are relatives, close friends, charities and other trusts established for the benefit of these beneficiaries. A charitable trust, a company or another trust can also be a beneficiary.
To meet a family’s changing needs, most trust deeds include the power to add more beneficiaries after the trust has been established. Some trust deeds say that this power ceases when one partner dies. This can avoid the surviving partner being seen to favour a new partner or stepchildren. However, it’s becoming more common for trust deeds to allow this appointer role to be handed on from settlor to someone else, or to two or three people, when the settlor dies or is no longer mentally competent.
It’s important to remember that discretionary beneficiaries don’t have an automatic right to receive benefits from the trust; they only have a right to be considered by the trustees when the trustees decide to make benefits available. This means that the group of beneficiaries you choose should be wide enough to include people who you actually want to benefit from the trust but not so wide that the trustees have to consider the needs of a large disparate group.
You will also need to think about who will receive whatever remains of the trust assets when it is wound up; these people are usually called the ‘final beneficiaries’.
It may be that more than one trust should be established to protect the interests of a single family. This arrangement is particularly suitable where: