Advivo Partner, Chris Morris, shares the most important reason why an estate plan is important for anyone with a discretionary trust.
To save you reading to the end, if you want one reason, it’s this: to help ensure your wishes have the best chance of being fulfilled. If you want to understand why and where things can very quickly go horribly wrong, even for those who understand asset protection strategies, then please keep reading.
Estate Planning includes determining how you would like your assets to be dealt with after you die and putting appropriate mechanisms in place before your death to help ensure your wishes are achieved. In many circumstances, however, estate planning needs to look beyond those assets that you own and consider assets that you control as well.
Asset Protection Strategies
We’ve all heard the stories of that person who doesn’t even own the house they live in, and yet, by all accounts, they’re wealthy. This is because asset protection strategies can include holding assets outside of your own name, i.e. in trusts and/or companies so that they’re somewhat protected from claims against you personally.
What many don’t realise, however, is that when such strategies are in place, a simple Will may not be enough to achieve what you’re hoping for your accumulated wealth or that of your estate upon your passing.
When an individual controls structures (including trusts and companies) which hold accumulated wealth. The ‘control’ of such structures should be addressed as part of your estate plan, and ‘control’ doesn’t necessarily come with the transfer of personal assets which means a simple Will just won’t be sufficient.
Case Study Example
Let’s look at an example whereby an individual has accumulated wealth via a family trust. This person was smart, they had ‘gifted’ the majority of their personal accumulated wealth (most of which was received from a family inheritance) into a trust as a means of both protecting those assets, and enabling tax minimisation opportunities for the future.
The intention was that upon the passing of the individual, they would leave all their personal assets (which made up around 1/3 of the total assets they controlled) to their current life partner. The remaining 2/3 of what would be considered their wealth, was held within a family trust.
Upon their death, the individual wanted control of the family trust to pass to their adult children. The reason for this was that the individual’s adult children were dependents from the individual’s first marriage, which is also where the inheritance ultimately came from, on the passing of the individual’s first spouse many years prior.
As mentioned, the individual in this example was smart and they had a corporate trustee in place for their trust, the Directors of which would ultimately control the trust as well as the income or capital (wealth) of the trust.
Therefore, as part of their Will, the individual ensured that the shares of the corporate trustee were to pass in equal portions to the adult children of their first marriage. This was done knowing that the shareholders appoint the Directors of the company, and in this instance, it is the Director who will control the wealth in the family trust.
This Strategy Almost Worked
What the individual didn’t consider, was that the trust was established whilst their first spouse was alive and persons listed as the ‘Principal’ of the trust (who is the person or persons who have the power to remove a trustee and appoint a new one), were both the individual and their first spouse who had passed away many years earlier.
This meant that when the individual passed, their shares in the trustee company were to pass to their adult children as intended. They, in turn, would appoint themselves as the new directors of the trustee company, effectively giving them control of the trust.
What went wrong?
The current spouse (from the deceased individual’s second marriage), who was not a parent of the adult children, was furious when they learned that the majority of their now-deceased partner’s accumulated wealth was to pass to the adult children from the first marriage and not to themselves. The deceased individual’s Will was very clear in that the executor/executrix of their Will, was to be their current spouse.
Regardless of control of the trustee passing to the adult children as part of the deceased individual’s Will, the Will was silent on any change to the ‘Principal’ of the trust. After reviewing the trust deed, the current spouse, now the Legal Personal Representative (LPR) of the deceased, realised that they were now in effect, the sole principle of the trust, meaning that they had the power to remove and appoint a new trustee of that trust. Needless to say, they did exactly this, and after removing the company which the adult children would then control, and appointing themselves as Trustee, they attained full control of the family trust and the wealth within it.
How could this have been avoided?
Estate planning can be complicated, and in order to ensure your wishes have the best chance of coming to fruition, it’s best to seek professional advice to minimise risks of situations such as the above happening to you. If you’re worried that your estate plan may need some adjustments or even just a review to ensure its relevance, feel free to contact us today to see what can be done to help increase the chances of your wishes coming to fruition.
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