There is no ‘one size fits all’ answer. The scenarios provided in this article outline the solutions for different trustee situations, that is, (1) if a sole individual trustee dies or (2) if one of two or more trustees dies or (3) if a director of a company trustee dies.
People are often persuaded to create a family trust on the advice of their accountant or financial planner. The purpose of the trust may differ, it may be for asset protection or for positive tax outcomes and income splitting or to maintain an asset in a structure for the next generation.
In NSW a trust can last up to 80 years from its creation unless it is an old one, that is, pre 1984 and it may last a bit longer.
A family trust (also known as a discretionary trust) is a complex legal structure but below is a diagram to show a family trust in simple terms.
Firstly, if the sole individual trustee dies:
The family trust deed often has a clause which sets out the change of trustee procedure. This has to be followed strictly to ensure the change of trustee is done properly. If the trust deed has no change of trustee clause, Clause 6 of the Trustee Act NSW 1925 allows the legal personal representative of the deceased trustee to appoint a trustee. Each state and territory of Australia has similar but slightly different laws.
A solicitor with experience in trusts will draft a deed to ensure that a new trustee is appointed correctly. If appointed by the Trustee Act, the deed must be registered at the NSW Land Registry Services.
There can be serious consequences if a trustee is not correctly appointed such as decisions a trustee makes or distributions of income or capital being invalid, particularly if there is a dispute.
The assets of the trust must be transferred from the deceased trustee to the new trustee. A solicitor will need to assist if there if real estate owned by the trust and a stock broker if there are listed shares.
Special care needs to be taken with the transfer of real estate to avoid stamp duty. The new trustee cannot be or become a beneficiary of the Trust (see section 54(3) Duties Act NSW 1997).
Secondly, if there are two or more individual trustees and one dies:
In this case, the death of one trustee means that the surviving trustee/s can continue to run the family trust. This may not be ideal, depending on who the remaining trustee is. The trust deed usually provides a clause with a mechanism to appoint or remove trustees. If not, the Trustee Act 1925 can apply, as referred to above.
However, extra care needs to be taken here to avoid stamp duty on the transfer of dutiable property (for example, real estate) from the old trustees to the new ones. If the surviving or continuing trustee remains a trustee with a new trustee and that continuing trustee is also a beneficiary of the trust (Section 54(3) Duties Act NSW 1997) full stamp duty may be payable, possibly tens of thousands of dollars.
Thirdly, if the deceased was a director of a company:
If the company is the trustee of the family trust, the death of a director of the trustee company is not necessarily a cause for alarm. The company itself will continue (a company does not die). If there were two or more directors, the remaining director/s of the company can continue to run the family trust.
If the deceased was the only director of the trustee company, it can get tricky.
Shareholders of the company generally have the power to appoint new directors. If the deceased director was also the sole shareholder, the deceased’s estate will need to be sorted out before the shares in the company can be transferred to the beneficiary pursuant to the deceased’s Will. The beneficiary being the new shareholder can then appoint a director.
This takes time and if the trust is running a business, may be highly disruptive to the business as no decisions can be made before a new director is appointed.
To avoid delay, a director can be replaced quickly if the constitution of the company is amended at an earlier point in time to allow for it. Again, this requires planning with the assistance of a solicitor.
Another way a company trustee is replaced is where the trust deed contains the role of an appointor. The appointor’s role is to appoint and remove trustees. The appointor is the “controlling mind” of the trust. Commonly the appointor is one or two of the directors of the trustee company, for example the husband and wife. It may also be a business associate or other family member.
Unlike individual trustees, there is no change of ownership required for family trust assets when there is a company trustee. The company continues to run the trust and own the assets on behalf of the beneficiaries.
It is important that if there is a death of a trustee or a director of a trustee company that the new or replacement trustee is validly appointed. If not, dealings of the new trustee may be invalid if challenged by other family members or there may be unwanted tax and duty outcomes.
*What is a Trustee
The trustee or trustees are essentially in charge of the family trust.
A trustee can either be an individual (commonly one or two people) or a company. The trustee is appointed when the trust is set up and the trustee signs the family trust deed.
The trustee holds the legal title of assets owned by the family trust. However, the trustees are holding the assets on trust for the beneficiaries.
The trustee/s are governed by the terms of the family trust deed. They can only do what is allowed within the terms of the deed and associated legislation.
As the family trust is a discretionary trust (there are different types of trusts), it is for the trustee to decide (that is, the trustee’s discretion) which beneficiaries receive income generated by the assets owned by the trust.
Similarly, it is also for the trustee to decide when or if the beneficiaries receive the assets (capital) of the trust depending on the terms of the trust deed.
The family trust’s purpose is often to keep the assets in the trust for asset protection purposes and to avoid triggering capital gains tax or stamp duty.
The trustee also has the power to buy and sell assets within the trust.