© 2024 First Samuel Limited
Trusts: a primer
Most of our clients use a ‘trust’, often without realising it. All superannuation assets are held in trusts, be it a self-managed superannuation fund, an industry fund or other public offer fund. Many clients also employ a ‘family trust’ to hold investments. And there are testamentary trusts; fixed trusts; bare trusts and hybrid trusts.
A trust is simply a legal relationship and not a separate legal entity1. It is an obligation to hold and manage property (usually cash and other assets) for the benefit of another (Beneficiary).
The person or entity that discharges the obligation and is legally responsible for the property of the trust is the trustee.
Each state of Australia has its own laws that apply to trusts under its jurisdiction. These grant the trustee its powers and govern the role and duties of the trustee.
All trusts have a settlor. This is a person who establishes the trust, determines the beneficiaries and appoints the trustee. The settlor will commence the trust by handing over the settled sum to the trustee on the terms stipulated in the trust deed, the document that sets out all of the rules and obligations for creating and managing the trust.
However, many trusts, including many SMSFs, do not have an appointor or a successor appointor. In times of disagreement between beneficiaries and the trustee this might be a costly omission, particularly if the matter requires litigation to resolve it.
- However, the ATO treats the trust as a separate taxpayer.
What is an appointor and why is it important?
Where provided for under a trust deed, the appointor is the person who has the power (amongst other powers) to appoint and remove the trustee. These powers effectively give that person ultimate control of the trust.
Whilst the powers provide ultimate control, the role is practically about oversight of the trustee in the performance of its duties. It provides the Beneficiaries with some protection if there is a divergence of interests with those of the trustee or gaps in the performance of the trustee’s duties.
In essence, it is a fiduciary role.
Additionally, for those trusts that have made a ‘family trust election’, that is, made it a ‘family trust’, determining who is assigned the role of appointor carries further complexity. The decision needs to ensure it does not affect the ‘control test’2 in order, for example, to allow for the carry forward of tax losses in any applicable year, or to continue to pass franking credits from franked dividends received to beneficiaries.
2. The ATO only recognises a trust as being a family trust where a family trust election (FTE) has been made, and where the nominated ‘test individual’ and their ‘family’ control the trust, with some exceptions. Control is defined as where a group consisting of the ‘test individual’ and their ‘family’ has the power to control or obtain the beneficial enjoyment of the income or capital of the trust, or to remove or appoint the trustee.
What is a successor appointor?
A successor appointer is the person who succeeds the appointor in the event of the latter’s passing or incapacity, or at another predefined event or time.
Whilst not all trust deeds provide for an appointor, even fewer yet cater to the succession planning for that person. It is not uncommon that some deeds effectively end the role of appointor upon the person’s passing or incapacity.
However, as a trust can last typically for up to 80 years, or indefinitely in South Australia, it should not be taken as granted that a trust shall continue to operate harmoniously, efficiently or effectively through its natural life.
Incorporating a pre-determined successor appointor, or at the very least documenting the power and a distinct process for the later appointment of one, ensures that there is continuity of the fiduciary or oversight of the trustee.
Some clients will be familiar with the landmark 2020 legal case of Re Owies Family Trust3. That case highlighted that the mere existence of powers within the deed to vary the deed was not sufficient to enable future successor appointors via a deed of variation.
3. 2020 VSC 716.
What happens if you don’t have an appointor/ successor appointor?
The inherent risks of not having these roles in place may mean that, for example:
- The trust is not being properly administered;
- The trust is not being managed in the best financial interests of the Beneficiaries;
- A poorly performing trustee may continue in that role; or
- Disagreements between Beneficiaries or a Beneficiary and the trustee result in unnecessary legal action and attendant costs.
What next?
There is merit in seeking advice to ascertain whether your trust(s) has (have) existing appointor/ successor appointor provisions. And if not, whether your circumstances would suggest there is merit in their consideration. Speak with one of our Private Client Advisers so they can assist you in this process.
The information in this article is of a general nature and does not take into consideration your personal objectives, financial situation or needs. Before acting on any of this information, you should consider whether it is appropriate for your personal circumstances and seek personal financial advice.