Succession Planning for
Non-Estate Assets: Understanding Your Family Discretionary Trust

If you have assets in a family discretionary trust, it’s essential to plan for what happens after your death. Since the assets in the trust are not part of your personal estate, they cannot be distributed through your Will. However, there are ways to manage who will control the trust when you’re no longer around
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What is a Family Trust?
A family trust (also known as a discretionary or inter vivos trust) is a legal structure often used for asset protection, income distribution, and tax planning. In this structure, the trustee holds assets on behalf of the beneficiaries, who are typically family members. It’s important to remember that the assets belong to the trust, not the beneficiaries, meaning they don’t form part of your estate.

Who is the Trustee?
The trustee is responsible for managing the trust, making decisions about distributing income or assets, maintaining financial records, and deciding when the trust ends. If you’re the trustee (either alone or with others) or if a company you control is the trustee, you need to consider what happens to the trustee role upon your death. This is typically outlined in the trust deed, the legal document that governs the trust. In many cases, your executor or surviving co-trustees may take over. If a company is the trustee, control will pass to whoever inherits the shares in that company.

Who Controls the Family Trust?
In many cases, an appointor holds the ultimate power because they can appoint or remove trustees. If you’re the appointor, subject to the trust deed, your Will may specify who should take on this role after you pass away, whether it’s a family member or an independent person who can follow your wishes.

Who are the Beneficiaries?
Beneficiaries are the individuals or entities eligible to receive income or assets from the trust. There are generally two groups of beneficiaries—those who receive income during the trust’s operation and those who receive assets when the trust ends.

Although the trust’s assets aren’t part of your personal estate, it’s important to consider how your Will can balance out any differences in how your beneficiaries are treated, especially if some persons are not included in the trust.

What is the Vesting Date?
The vesting date is when the trust must be wound up, and its assets distributed. This could be a fixed date in the trust deed or decided by the trustee. In some cases, the trust might end shortly after your death, distributing assets to the beneficiaries.

What About Loans?
During the life of your family trust, you may have contributed personal funds, which essentially creates a loan from you to the trust. Similarly, loans may exist between the trust and its beneficiaries if income has been allocated but not yet distributed. These are typically recorded as “beneficiary loan accounts” and are treated as liabilities of the trust.

Even though the assets in the family trust don’t form part of your estate, any loans you’ve made to the trust are considered assets of your estate. This means your executor may seek repayment of these loans after your death. It’s important to plan your Will carefully so that your passing doesn’t force the trust to sell assets to repay these loans unexpectedly.

If you’ve taken out loans from the family trust, these loans will usually become liabilities of your estate and repaid to the trust after your death. The impact of these loans on your estate and beneficiaries should be considered as part of the estate planning process.

Need Help?
Succession planning for a family trust can be complex, but we’re here to guide you through it. For advice specific to your situation, please contact Wills and Succession Lawyers.