Estate Planning- Living Trust and Discretionary Family Trust

 

Estate Planning 

A Revocable Living Trust

A "living trust" (also called a revocable living trust) is legally in existence during your lifetime, has a trustee who currently serves, and owns property which (generally) you have transferred to it during your lifetime. While you are living, the trustee (who may be you, although a co-trustee might also be named along with you) is generally responsible for managing the property as you direct for your benefit. Upon your death, the trustee is generally directed to either distribute the trust property to your beneficiaries, or to continue to hold it and manage it for the benefit of your beneficiaries. Like a will, a living trust can provide for the distribution of property upon your death. Unlike a will, it can also (a) provide you with a vehicle for managing your property during your lifetime, and (b) authorize the trustee to manage the property and use it for your benefit (and your family) if you should become incapacitated, thereby avoiding the appointment of a guardian for that purpose.

A revocable living trust, allows you to retain control of your assets as the trustee or co-trustee and be able change the living trust as circumstances in your life change, such as remarriage or more children. You are also able to revoke the trust itself.

An advantage of living trust is that it bypasses the costly and time-consuming process of probate, enabling your successor trustee (who fills basically the same role as an executor of a will) to carry out your instructions as documented in your living trust at your death, and also if you are unable to manage your financial, healthcare, and legal affairs due to incapacity.   

What is an Irrevocable Trust?

As the name suggests, an irrevocable trust is a trust which cannot be revoked by the trustmaker. In other words, once an irrevocable trust has been established, the trustmaker cannot take or transfer back the trust assets from the trust.

 In addition, in the case of an irrevocable trust, the trustmaker must step aside and appoint someone else to serve as trustee of an irrevocable trust. Moreover, generally an irrevocable trust cannot be changed or modified. Where change is permissible, such change will require prior consent of all named beneficiaries or a court of law.

 
It should also be noted that unlike a revocable trust which is intended to close up after the death of a trustmaker, an irrevocable trust can remain up and running indefinitely after the trustmaker’s death.

Benefits of an Irrevocable Trust include assets protections and tax saving (as discussed below). In relation to assets protection, the trust assets are transferred to a third party (usually a company) and therefore they are generally beyond the reach of creditors. Moreover, the unlike a revocable trust, an irrevocable trust is not affected by death of any of its trustees.

What is a discretionary trust?

A discretionary trust is a trust where the trustee has the discretion as to how to distribute the income and capital of the trust. The exercise of the trustee’s discretion is governed by the terms of the trust deed of the trust

What is a Family Trust?

A family trust is a type of discretionary trust set up to hold a family’s assets. In accordance with the trust deed, the controller of the family trust (the trustee) distributes the income and assets of the trust to the other family members (the beneficiaries).

A trust deed is a document used to set up and manage a trust. It sets out the:

(a)         settler (the person who set up the family trust);

(b)         trustee;

(c)         appointor (the person with the power to remove or appoint the trustee);

(d)         details on what the trust contains; and

(e)         management process for the trust.

The assets remain in the trust until the trustee distributes them. The trustee is considered the owner of assets in the trust. However, this is only on the behalf of the trust; the trustee does not have legal ownership of any of the assets. 

The Benefits of a Family Trust

There are two main benefits to managing assets through a family trust are:

(a)       Tax Benefits

Placing assets into a family trust minimises your family’s overall tax liability. By spreading the family’s income across multiple beneficiaries from year-to-year, you can minimise the tax you pay as different family members within a family group fall within different tax brackets. The trustees have a discretion to make greater distributions to beneficiaries who are in lower tax brackets.

(b)       Asset Protection

By placing assets in the trust, it is no longer the property of its original owner and becomes the trust’s property. Therefore, if your personal assets are ever at risk of being seized (for instance, if you were being sued or becoming bankrupt), the property will be considered trust property and will not be in jeopardy. Therefore, a family trust is a good thing to consider for those in risky careers or those who are exposed to risk of constant litigations and other liabilities. 

What are the beneficiaries’ rights under a discretionary trust?

Unless where otherwise stated in the trust deed, a beneficiary of a discretionary trust cannot compel the trustee to give them any of the trust property.  However, beneficiaries have the right to:

(a)         due administration of the trust;

(b)         seek information relating to the management of the trust;

(c)         request, but not require, the trustee to exercise its discretion to make distributions to them;

(d)         take the trustee to court if they deal with the property in a way which is not in accordance with the terms of the relevant trust deed.

Is a Trust Right for You?

There are many different reasons to establish a trust:

(a) Does your like of business or profession expose your estate to potential legal liabilities or litigation;

(b) Are you likely to have contingent liabilities that might expose your estate assets to creditors?

(c) Are you in a general partnership that exposes your personal assets to litigation or insolvency proceedings from your partners or creditors;

(d) Do you have a family member who is unable to manage their affairs due to disability, sickness or addiction?

(e) Do you have complex assets that require professional stewardship?

(f) Are you at a risk of separation or divorce?

(g) Are you part of a blended family?

(h) Are you interested in tax savings for your beneficiaries?

(i) Would you like to support charitable causes now or as part of your estate?

If your answer is "yes" to any of the above, it is recommended that you seek our legal advice regarding establishing a suitable trust.

If you would require any legal assistance or advisory in set up a living trust/ an irrevocable trust, or a  family trust, please feel free to contact us via  mainacy@gmail.com