As business owners prepare for the new financial year, this time often heralds reflection on (and assessment of) current business structures. It is also a time where we, as lawyers, are called upon to advise clients in respect of out-dated family trust structures which their business has either outgrown or which require amendment due to changes to the family dynamic of the business owners.
Discretionary (family) trusts offer numerous advantages which make them appealing to small to medium business owners, including:
- use as a vehicle for investment and trading whereby the trustee conducts the trading activity but does not beneficially own the assets in the trust;
- providing a form of asset protection from creditors;
- offering certain tax advantages, as income of the trust can be distributed by the trustee to beneficiaries of the trust who are on lower marginal tax rates; and
- providing a means of assets control across successive generations of a family.
Unfortunately, over time, circumstances change and the way in which a family trust was originally set up may no longer be appropriate for the current state of affairs. This can create certain risks for businesses which, if not addressed, can result in significant disruption or disputes in relation to control of a business or access to trust assets. Such circumstances frequently include:
- Where the directors and shareholders of the Trustee company have retired and no longer take part in management of the business.
- Where the holders of key roles such as the Appointor, Guardian or Trustee have died and not been replaced.
- Where key roles such as the Appointor, Guardian or Trustee were held jointly but there has been a breakdown in the relationship between those two people.
- Where the Appointor may have the power to remove a Trustee but that Appointor is no longer a part of the family or the business.
- Where the Guardian is required to provide consent to certain decisions of the Trustee but is no longer in contact with the family or the Trustee.
- Where the trust deed has been lost creating a number of difficulties including the inability to access loan facilities, discern the rules for distributing assets or understand the powers of the Trustee, Appointor or Guardian.
- Where the ‘vesting date’ is imminent (or has passed). In Victoria and many other states, a trust can have a maximum duration of 80 years and will thereafter ‘vest’. Whilst many trusts are set up with this period as a default, trusts can also be established for shorter periods, depending upon the objectives of the family (or trust Settlor) at the time at which they were established. For example, trusts may be set up to endure only for say 20 or 40 years or their dissolution can even be triggered by an event such as the death or maturity of a named beneficiary. When the trust vests, this will often mean that the beneficiaries have become absolutely entitled to the assets – an egg which can be very difficult to unscramble.
Depending upon the circumstances and the provisions of the trust deed, the above difficulties can potentially be resolved through:
- A variation to the trust deed (in circumstances where the trust deed rules allows it);
- An application to a Court to make a declaration (for example, to reconstitute a lost deed or to provide key direction in relation to dissolving the trust and distributing assets);
- Establishing a new vehicle or structure for the business to trade through which provides more security or is more appropriate to the current business structure and management.
Integral to navigating the discretionary trust minefield is good financial and legal advice. Your business accountant will be critical in assessing the best path given their intimate knowledge of your business circumstances and can often work best when in lock-step with a trusted legal advisor. Guidance from legal professionals who have a commercial mindset and understand your long term business and succession planning objectives plays an essential role.
If you require assistance with assessing your current trust structure or advice in relation to changes you consider necessary, contact Rankin Business Lawyers for practical, on-point commercial legal guidance.