Taking Care Of Your Trusts

Monday 14 November, 2005

by Andrea Watson and Emma Woolley

So you have gone to the trouble of establishing trust structures, but are you looking after them properly? Trusts are generally robust, but because they can endure for 80 years, they need to be regularly revisited to ensure they continue to meet the purpose for which they were established and comply with best practice.

When reviewing your trust arrangements, you should arrange for any essential maintenance work to be carried out. Trust deeds vary, as do the reasons for their use, so different issues will arise.

Here are some common ‘traps’ and ‘troubles’.

Distributions

Trap

It is important not to simply assume a proposed recipient of a distribution is a beneficiary.
While seemingly obvious, always check the trust deed (and any variations) to ensure the person is either named as a beneficiary, or falls within a specified class of beneficiaries.
Trouble

Paying out to a non-beneficiary can spell ‘double trouble’ for the trust. The trustee may find itself defending a claim for breach of trust brought by the disappointed ‘real’ beneficiaries. Further, either the trustee may be taxed on the income at top marginal rates, or, where the trust contains default beneficiary provisions (as most do), those default beneficiaries may be taxed at their own marginal rates.

Resolutions

Trap

A trap arises, even if the trustee has paid the trust income to the right person. The trustee must also make sure the exercise of the power is ‘effective’. The trustee’s resolutions recording distributions should be clear, complete and kept up-to-date.
Trouble

An ineffective exercise of the power to distribute income may result in adverse tax consequences for the trustee, or any default beneficiaries. Those default beneficiaries may find themselves deemed to be presently entitled to the trust income and taxed, even if they never receive the income.

Right for the Role?

Trap

The roles of appointor and guardian can be crucial, given their influence on the control of the operation of a trust. It is critical to check that the most appropriate people hold these positions and that plans for their succession are put in place. It may be that a change in circumstances since the establishment of the trust, e.g. death or divorce, means that the roles need to be reviewed.
Trouble

The terms of the trust may provide that an appointor or guardian’s legal personal representatives will take over the role on death of the current holder of these positions.
This may be undesirable, or even disastrous, depending on who is appointed as the legal personal representative of the deceased appointor or guardian, or who inadvertently takes over the role if the successor dies and their personal representative holds the position.
These are just some examples of issues that commonly arise and can be avoided by getting professional advice and assistance when conducting trust reviews

Source:ceoonline.com