Discretionary trusts – What happens to the assets held on death?

Discretionary trusts are an incredibly valuable tool for structuring the affairs of your business, investments and family finances. These trusts allow the trustee to split the income of the trust assets between a family group. This has significant tax advantages as the trustee can vary the amount of income paid to a beneficiary in light of that beneficiary’s other income.

It is important to consider what will happen to the assets held under a discretionary trust when you pass away. After all, you are unable to directly bequeath these assets through your Will. This is because a trust is a separate legal entity. Under a trust structure, the assets are owned by the trustee of the trust and do not automatically form part of your estate.

However, the trust can be structured in a way that preserves its longevity after you pass away. This can be considered through a holistic estate planning process.

One such strategy involves drafting your trust to include a clause which stipulates who will become the appointor or “controller” of the trust should you die or become incapable of performing this role. The role of an appointor is highly important, as this person has the power to appoint and remove trustees. They have the power to decide if any changes are made to the trust. The Appointor can nominate in writing or by a Will a trusted replacement Appointor to oversee the function of the trustee.

If you are the trustee of your own trust, a second option might be to draft the trust to stipulate who will replace you as the trustee by default when you pass away.

Alternatively, if the trust is managed by a corporate trustee, you can also nominate who will be the director or shareholder of the trust. This can be done through your Will, by company resolution, or through a Business Succession Agreement. By nominating a trusted replacement trustee, you can be confident that the trust will be efficiently managed when you pass away.

During the estate administration process, it is also important to check the balance sheets of the trust to determine whether there are any unpaid present entitlements or loan accounts owed from the trust to the deceased. This can be paid out by the trust to the deceased’s estate and is payable on demand by the executor as a debt due and owing.  The alternative is to forgive these loans so that the capital remains held by the trustee of the trust to the amount of the loan.

Through these strategies, you can ensure that your family members continue to benefit from the advantages of the discretionary trust continue once you pass away. At Perspective Law, we approach the estate planning process as a holistic strategy which addresses all aspects of your legal affairs. For further information, please do not hesitate to call our office on (07) 3839 7555.