Expect The Unexpected In Family Trusts.
Reviewing your trust regularly while getting specialised advice along the way is key to avoiding any family conflict, as shared in our scenario below.
Alex and Sam had a blended family, each with children from their first relationships. They had a very successful business and several investment properties, all held within their trust. The advice at the time was to each establish their own trusts so they could separately provide for their respective children, but they were very confident that the children got on well together and that it was going to be a lot simpler to have everything in one trust.
Alex and Sam felt like they worked as a team with their advisors to achieve the best for their families. They often talked about the “worst case scenario” and Alex and Sam felt that their structure and documentation provided for anything life might throw their way.
Above all, they took comfort in the strong bond they shared with their kids.
Over the years there had been considerable income flow through the trust. The trust had been able to pay for university fees for the three out of four children who attended. They had always maximized the tax flexibility of their trust, flowing income to the children to pay for these things and allocating a bit more to get the best tax results which were allowable under the tax rules relating to trusts. Sam’s younger daughter, Maddy, hadn’t gone to university but they still had allocated income to her to achieve a good tax outcome.
Alex and Sam had a friend who was an independent trustee of the trust. Although she had a busy schedule, they could always rely on her to sign the necessary documents.
They didn’t have trustee meetings but thought that as everything was so relatively straight forward, they didn’t really need them. She signed the accounts each year, but they didn’t review them together.
Then things went sour with Maddy. Maddy had a new partner, Cam, who neither Alex nor Sam particularly liked. They thought he was a bad influence on Maddy - he seemed to be very negative and combative, always looking for the worst and trying to cause an argument. Cam would often comment about the other children in a negative way and when Sam tried to talk to Maddy about this, she was very defensive of him.
Things escalated one night when Cam started asking questions about the trust and the benefits the other children had received.
A week later Sam received an email from Maddy. While it came from her, it read as if she had taken legal advice. The email asked for financial information about the trust, in particular asking questions about the benefits the other children had received. A very distraught Alex and Sam made a time to see their lawyer.
The lawyer firstly gave some information around the kinds of information that beneficiaries could request under the Trusts Act. She also looked at the most recent financial statements to the trust. Having a look at the beneficiary current accounts, she noted that Maddy was owed $250,525 by the trust, being income which had been allocated to her over the years, but not actually paid out. The lawyer said that this was a real debt owed by the trust to Maddy and that she could technically demand payment at any time. There were also potential tax issues with Maddy being considered a settlor of the trust because of the amount owed to her by the trust.
This was extremely distressing to Alex and Sam. In any other circumstances they would have been able to explain to Maddy how the allocation had operated and that the funds could be used to benefit her over time. However, knowing the headspace that she was in now, who knew where this might end up.
While Alex and Sam had been confident with the way their trust and family dynamics worked, it only took one incident for things to be turned on its head. There were solutions to this family drama, but it would take some solid advice and time to solve it.
If you feel you could use some specialist advice for your personal situation contact our Trusts & Wealth Protection Team.
