Tara (00:50):
Hi, thank you for tuning in to the Art of Estate Planning podcast. It is episode 35. I am your host, Tara Lucke, founder of the Art of Estate Planning, and I am really excited about this topic and I guess I'm just showing what a bit of a nerd I am because the topic is why you should not be nominating trust succession in the controller's will.
(01:19):
So yeah, kind of niche I guess, but I feel like this comes up way more than it probably should, and I just wanted to do my part to try and explain it in a really straightforward way for people who maybe aren't dealing with family trust succession all the time and when it comes up they aren't really sure or they've just been sort of told by a mentor once how they did it back in the olden days. And I will just say I think I don't want anyone to feel like if they've done it through the will in the past and dealt with the trust succession through the will in the past that it was necessarily wrong. I just think that the way that practitioners are dealing with trust is just increasingly getting better each and every year. And what we might've done 10, 20 years ago was fine, but there wasn't optimal.
(02:23):
And with the benefit of everyone becoming more familiar with trusts, trust deeds themselves, getting better learnings from more cases, I think we can really keep pushing what is the gold standard. So I'm not trying to make anyone feel bad or shame them if you have done it this way, but I would like to maybe shine a light on ways that we can do things better now. And I think with trust, we just all have to be so forgiving of ourselves because back in the eighties, which was only 20 years ago, right as anyone else's brain, not do the maths properly when they think about the eighties, okay, so it was like 40 something years ago, but trust really didn't even start becoming popular in common until the eighties, for example. And then it was only a very small proportion of community, very sort of high net wealth type clients.
(03:28):
I don't think a lot of lawyers and accountants were used to dealing with them all the time, whereas over the last 40 years they've become way more commonplace where lots of people have them, they're using them as trading structures, investment vehicles. My family has at least three trusts. You probably have trusts in your family as well as you're listening to this in a profession. So yeah, don't want to make anyone feel bad, but it still comes up quite a lot about, I see this in the Art of Estate Planning Facebook group, and that's what inspired this post saying, has anyone got a clause that I can put into the will for family trust succession? And of course I just go, oh no, I really think we can maybe do a bit better than that. So let's start at the very fundamentals and acknowledge that clients themselves can get really confused.
(04:27):
And there's a real misconception that the assets in the trust, like of inter-vivos family trust can just be gifted under the test date as will, which of course is not the case. The trust just keeps on keeping on. And what we need to look at is, okay, if our client has died, what roles did our client have in that trust? If they were a beneficiary, then of course they're no longer a beneficiary. If they were the trustee and the appointor principal guardian, of course they can no longer fill that role. The trust keeps continuing, the assets remain in that trust. It keeps on going on, but we have to fill any vacancies. So put the beneficiary role to the side. We don't fill that vacancy. That person just ceases to be a beneficiary and hopefully we've got a broad class of beneficiaries where there's other beneficiaries who can continue to benefit from the trust.
(05:30):
But if we've got a, I'll call them a controller, so that could be the trustee could also be the appointor or principal guardian, any of those roles, we need to fill the vacancy. Usually, I think in this scenario, I'm just going to keep it super simple and focus on, okay, what happens when our controller is the sole controller, so the trust is basically left a trustee or an appointor. That's the plan that we need to build so that immediately someone fills the vacancy and takes on management of the trust. So that's what we're trying to achieve. So the very first thing I think to do when working with clients with family trust is just to clear up any confusion they might have that the assets of the trust aren't technically theirs. They can't be gifted under their will out of the trust, they remain in the trust.
(06:29):
We have to hand over control of the trust. So okay, you think that's simple what we're doing a will as part of this estate planning exercise, why don't we just put in a clause in the will saying who takes over control of the trust? Okay, so you might, firstly, you need to make sure that in the terms of the trust deed, you actually are allowed to nominate a replacement in the will. So we can't even nominate a successor unless we're expressly authorised by a power in the trust deed. So if you're going to nominate a successor in the wheel, check that it's allowed and it says you can do it by will, let's start with the advantages of doing that. So you just put in a clause, I'm the current appointor and of the trust, and I nominate this person on my death to take over the role of appointor and you've got a power in your will.
(07:31):
Super simple. You're already preparing the will, you're already dealing with succession, you don't need an extra document. You're probably going to throw that clause in for free and not charge the client anymore. Unfortunately, there's a lot of issues where we kind of fall short of the gold standard. Firstly, we are only dealing with death, but we know that a controller can be removed from multiple scenarios. They can be removed obviously from dying, but also losing capacity. What about if there's a disqualification trigger in the deed where if they become bankrupt or have a judgement against them, perhaps a relationship breakdown, if that's part of it, there could be if they're out of the jurisdiction for an extended period of time, an absent, there could be other reasons why your control role has become vacant. If we are just using the will, the will only takes effect when the test data has died.
(08:40):
So we are actually not addressing all of those other reasons why the role may become vacant. We are only putting in a plan for one event, which is our controller dies. So we do not have a plan for incapacity of the controller and we do not have a plan for bankruptcy or anything else. So that's my biggest issue with using the will. Other things that I think are downsides, yeah, we're only dealing with one point in time, one eventuality. A lot of the time we are not building in different contingency plans. So we're not saying what happens if our first nominated successor can't act, we're not putting in place like a line of succession or different contingencies. It's a very simple, and I think it's too simple. Another thing that I think test status themselves would not appreciate, but a succession plan, any document creating a succession plan for a family trust becomes a trust document.
(09:54):
So suddenly we are making the test data's will a trust document and potentially exposing it to all of the disclosure obligations that attached to trust documents. So there's a technical argument that do we need to disclose the will to third parties when they ask for all of the documents constituting the trust terms, do we need to disclose it to the bank? Land titles, any beneficiaries requesting copies of the trust terms? So there could be a huge breach of privacy there. Now maybe you can redact everything in the will except that clause, but that's less than ideal. So I think that just goes into the column for saying using the will to nominate a successor is not the gold standard. And then of course, you can't even use this method if you don't have the power expressly authorising it in the trust deed. So what is ideal?
(11:02):
What is the gold standard? I would argue we'll start with, there's a couple of options. One of them is the deed of successor. So it's a separate deed done independently to the will as a trust document. And in that document, the current controller nominates who the successes will be for the trust. And the reason I like it is it's its own deed. So we can go into a lot of detail and at the art of estate planning, we have a family trust succession precedent pack, which includes a training on all of this, and it includes deed of successor precedent, and our precedent is like the deed is like five pages long because we go into a huge amount of detail around, okay, firstly we're covering all of the events that a person might find the role vacant for. So death, incapacity, bankruptcy, relationship breakdown, absence, whatever.
(12:10):
As long as the role is vacant, this succession plan applies. We can nominate multiple contingency plans. So person A is the first successor, but if they cannot act and take on the role, if they predeceased or have lost capacity or aren't interested in accepting the position, then it goes to person B. We can then say if person A takes on the role and then they die becoming capacitated, whatever to make the role vacant, then their successor is person B. For instance. We can be really clear about if we're appointing joint people, if it's B and C and C can't act, then is D filling the vacancy for C. If B can't act is A filling the vacancy for B, we can get as creative and expressive as we want. We can also say, put in all the stuff there about obligations to transfer over the documents of the trust, how we can revoke a successor plan.
(13:19):
We can really just deal with everything comprehensively that you can't deal with in a single clause in the will. Now you do of course need to have an express power in the trust deed saying that a successor can be nominated by deed. So you need to make sure that you have that in there before you go and do a deed of successor. But the reasons why I like the deed of successor, we don't have that same privacy and confidentiality issue. Great. This is a trust document. Let's disclose that document as part of the trust terms. We've got no confidentiality about other personal issues unrelated to the trust. We can deal with multiple contingencies, we can deal with different timeframes. If we are nominating a first successor and then six months later they can't, then maybe we don't want it to be person a's executor as the next person in line.
(14:20):
We actually want person B to be the next successor so we can really roll from the grave a little bit. Now the disadvantages are it's an extra document that you have to sell to the client and recommend to them to prepare and ideally charge for that can be a pro or a, I guess in terms of increasing your customer average spend, I think it can be really positive. It's increasing your fees from your file, but do obviously have to do some work in bringing your client on the journey about why the will doesn't address the family trust and why they need this extra document. Now I'm just going to take a break there. I really want you to hear from one of our clients, Lauren Dunn, about what she's doing in her estate planning practise and how the art of estate planning precedents have supported her.
Lauren (15:18):
Hi, I'm Lauren from Illawarra Estate and Family Lawyers and I'm an estate planning well, I opened my cell practise 18 months ago and when I was setting up a new using the art of estate planning testamentary trust precedents and being a member of the testamentary trust club were something that would be beneficial to myself and my clients. I've been a part of the art of Estate planning group and Tara's passion and knowledge was evident in her responses to group members tricky questions. Finding the art of estate planning precedent has been an investment in my family that I do not regret as a member of the testamentary at the TT Precedents Club. When Tara released her Smokeball compatible precedence, I received the updated version at no cost. The seamless integration into my practise management software has half the time I spend preparing documents allowing me to serve my clients more efficiently and the out of estate planning precedents and the TT Club have made me more confident in delivering testamentary trusts to my clients. And knowing my precedents are up to date has reduced a portion of my mental load, I would highly recommend looking into these precedents.
Tara (16:21):
Okay, now I want to deal with two more options for family trust succession. So the next one is the deed of variation approach. So actually varying the trust deed to hardwire in or build in who the successor is. So you would do this where your trust deed does not have the appropriate powers to rely on a deed of successor basically. So you're actually updating the deed first to put in the powers that you want to say that the controller can nominate a successor by deed. I would also just build out and make sure that it's really clear how their whole role works. Put in your appropriate disqualification events, talk about what happens if there's joint controllers and insert default successor mechanisms for when the controller doesn't actually take any proactive steps to nominate a successor. And I'll talk about that in a moment. But you can basically modernise the trust deed mechanisms with a deed of variation.
(17:36):
So you do that and then you could then go and do a deed of successor or rely on the default succession mechanisms or if you really wanted to wire in through the deed into the actual terms of the deed, who the next successes to the control role are. So it kind of depends on whether you want to doubly entrench it and make it hard to change or if you really want to do the deed of successor approach, but you don't actually have a power expressly authorising the controller to nominate a successor by deed. You could do the deed a variation. So the advantage is you're modernising the deed and bringing it up to 2025 compliance or whenever you're listening to this, obviously the disadvantages are you can't do it unless you've got a variation power that is sufficiently broad and allows you to do it.
(18:36):
You do need to prepare an additional document. The deeds of variation can get a bit tricky with drafting and we've seen a whole host of cases come through the courts in the last five years where people have tried to use deeds of variation in relation to trust control succession and messed it up and it's been ineffective because they've done things like tried to vary a schedule where the variation power doesn't allow you to vary a schedule. They've tried to vary the appointor or succession of appointor role without the consent of the appointor and tried to undermine that role. So there's lots of ways you can get it wrong. It's really easy to do if you know what you're doing though. And in our family trust succession precedent pack that I mentioned, we have a really extensive training where we talk about how to do it, what to look for mistakes not to make, and our deed of variation precedent, which comes in the trust succession precedent PAC is really set up in a way to try to make it idiot proof.
(19:47):
I don't want to say idiot proof, you know what I mean? It's just you'd need an extra coffee proof or this is your first time doing it proof no one listening or working in estate planning idiots. I know that because you all have endured a law degree to get here, but we've just tried to build in all those protections so that you don't fall foul of those mistakes as well. But it is on the more complicated side, but you are also setting the client up for success long term and allowing future generations to build in their succession plan. So that is another trick to have up your sleeve. And then lastly, counterintuitively, you could actually deal with family trust succession by doing nothing at all. So I call this the proactively doing nothing approach, and what you're doing is relying on an existing default successor mechanism that's already present in your trust deed.
(20:50):
So some trust deeds, like for instance, the testamentary trust deeds that we include in the art of estate planning will precedents. We have a existing successor mechanism in there which says if the trustee and appointor role, well let's just say the appointor role. If the appointor role is vacant and no successor has been nominated, there is a default successor who is automatically appointed to fill the vacancy. And that default successor is like the legal personal representative of the last surviving appointor. So the executor or of their will or administrator of their estate, the attorney under their financial attorney, if they don't have a success, if they've lost incapacity and they don't have an enduring power of attorney, then the primary beneficiaries can pass a resolution to nominate someone. If it's a corporate appointor or trustee, then the shareholders can pass a resolution. So we've just got a plan so that someone feels the vacancy and it doesn't have to go to court or default to the public trustee, which some trust legislation says.
(22:06):
So you might have a really good default success and mechanism for death and incapacity already in your deed. If it's a modern deed, you might already have that in there. If it's an older deed, chances are you probably don't, but why mess with something that's working? So if you've got a good default successor mechanism in the deed and it says it's the executor or financial attorney and you are like, well, that's great because the people who I was going to appoint as the successor in a deed of successor are the same people who are being named in the will as executor and being named in the financial power of attorney as attorneys. So we can rely confidently on our default successor mechanism and we don't have to do anything. We don't have to build in a clause in the will or anything like that. So that can work great.
(23:05):
It can also only work if some of the deeds in the nineties, they had a really red hot go, but they were just still not thinking bigger picture. And there's a lot of deeds from the nineties where the default successor only applies on death, but not other disqualification events and things like that. So you've got to make sure it's really comprehensive. If it only applies for death but not your other disqualification events, then I would be doing the deed of successor. It also only nominates one successor one point in time. So if person A is the current appointor and they die and then person B is their executor. Now when person B dies relying on this, it's person B'S executor, who then becomes the next default. And that might be a spouse, an in-law, that type of thing. And if the original testator wants to keep this in the family, they would prefer to nominate a sibling to be the backup successor, if that makes sense.
(24:16):
So you're still only dealing with one line of succession, which could be totally fine. If you trust the first successor to nominate their own successor considering everything appropriately, then that's fine. But if you think that there's a chance that once your successor becomes the appointor, they are not going to go and update their estate plan and you do want to rule from the grave, the deed of successor is the best way to do it. So obviously the advantages of thou proactively doing nothing and relying on the default successor mechanism, it's simple, it's affordable, you're not doing anything, you're just talking about what the plan is and giving it a tick. It's not as comprehensive. So I would say the gold standard is the deed of successor by far. If your trust is also a trading trust, you might also want to think about doing and power of attorney for the trust.
(25:16):
I mean, hopefully you've got a corporate trustee in place so that the trustee keeps on keeping on. Even if an individual behind that structure dies, the shareholder or director dies, at least we've still got a consistent trustee. And ideally you'd have an entity power of attorney as well so that we can just have someone acting on behalf of the trust and keeping on arrangements with suppliers, payroll, dealing with the bank, finance commitments, whatever it is. That's a topic for another day, but it would be remiss of me not to mention it as part of a succession plan. Another topic also for another day, but I will just throw it out there for people, maybe get some cogs turning, is we've really focused on single pointers and trustees, but where we have got joint, say we've got three appointor or four appointor, we really need to think about the interaction there about how they're going to act.
(26:27):
I did mention this in one of our recent podcast episodes about how many executors, but I'll just mention it again. So where you've got individuals who are the joint appoint or trustees, they have to jointly, and that means unanimously, they all have to agree. So it's very easy for one of them to have a veto power. They don't want something they can not agree, and the decision doesn't go ahead. If you have a company as say the trustee or the appointor with joint with multiple directors and shareholders, like three or four of them, we actually are in the domain of the corporations law and the decision making rules under the corporations law, which is generally majority rules. So if we've got a company making a decision as trustee about distributing the income for that financial year, then it's just the majority of the directors. So if you've got three children who expect that the income would be distributed in thirds between each of those children, but you've got two children ganging up on the third, those two children could actually pass a resolution to split it 50:50 between them and cut out that third sibling from the decision and from the participation in the income of the trust.
(27:58):
So that's just something to think about when you are setting up your succession plan, when we are getting to the next generation, particularly if it's like adult children sharing a trust. Another scenario where this is really important of course, is where the trust is to be earmarked and inherited by a particular child. This becomes incredibly important that that child inherits the control of the trust and therefore if they take over control of the trust, they have control of the assets inside the trust. So you wouldn't necessarily be relying on the default successor mechanism, assuming it's the executor of the estate because the executor of the estate probably isn't just that one child who is earmarked to take over control of the trust. So you've also really got to think about it. Then one more thing, and I guess there's all these loose ends around the periphery of family trust succession.
(28:59):
So I'll just mention this without going into it, but if you are, for instance, passing control of a trust to one particular beneficiary that the trust is earmarked for as satisfaction of their inheritance, make sure that there's no leakage from that trust into the residual estate through unpaid present entitlements or loan accounts, because that can really undermine that whole strategy. Well, I'll leave it on that note, thank you so much for tuning and listening in. If you do have any questions, let me know. I've got a really good training that actually dives into this in a lot more detail on YouTube that I'll put in the show. If this has got you excited and you want to go and do a further deep dive, check it out in the show notes and I'll see you next week. Hi, it's Tara here. I really hope you enjoyed today's episode.
