Setting up a family trust is a task that should be attended to with utmost care, careful planning and understanding of how trusts operate. To add another layer of complication to the mix, in many instances, you’ll find businesses that are structured as a family trust. If you are new to family trust litigation and this is your first time delving into the subject, this is the article for you. Today, we have a look at a beginner’s guide to family trust litigation and the internal and external legal challenges that one may face along the way. Read on to find out more!
What Is A Family Trust?
We’re going to start with the absolute of basics, which is dissecting exactly what a family trust is. In a nutshell, a family trust is often created to benefit family members and can be made to protect assets, hold family assets, avoid challenges or arguments about a family member’s will and also for tax purposes. Family trusts are a fantastic way to organise your finances and act as a form of protection for beneficiaries who may make hasty and unplanned financial decisions if assets were controlled in their own name.
Why Structure A Business As A Family Trust?
In Australia, establishing a trust is one of the most common ways to run a family business. If a family or family member is looking to build a business that can be passed down from generation to generation, utilising a family trust structure is a reliable and tax-effective solution for those who are aware of the legal technicalities.
According to Tax and Super Australia, any income that has been distributed to beneficiaries from the family business/trust is taxed at the same marginal rate that would apply if the money had been personally earned by the beneficiary. This results in significantly less tax paid overall which is why many family businesses structure themselves as a family trust.
While all this sounds like a great idea, it is very important to pay attention to the fact that trusts can be extremely complex and result in unsavoury consequences if not coordinated properly. This is especially apparent when there is a disagreement amongst members of the family.
Challenges in Family Business
Let’s look at a few scenarios in which a family trust may encounter challenges or be litigated against:
Even though most people don't want to entertain the thought of divorce or separation, it is something that is very important to take into consideration as it can have a huge impact on the family trust. The last thing anyone would want is for an ex-spouse or in-laws to take control over your family business or be on the receiving end of substantial income as a beneficiary of the trust.
A great example of such a situation would be the case of Australian mining heiress Gina Rinehart. Her public dispute with her four children was a classic example of a game of tug of war when it comes to “who gets what”. While your family business and trust may not involve billions of dollars, it is prudent to take into consideration potential disagreements that may occur with third parties in the long run.
Challenges can arise if there are unequal allocations of income between beneficiaries of a discretionary trust. In situations where one party may expect a higher level of income than another, it is all too easy for mistrust, complications and arguments to ensue. This can be further strained when there is mistrust between beneficiaries and the appointer of the trust. An appointer has the power to remove a trustee and appoint a new one. While it is recommended to have an appointer who can deal with a trustee who is in breach of their obligations, in some instances the appointer can also abuse their power and remove beneficiaries even when there has been no breach of obligations. In such a situation, the trust may encounter challenges or find itself being litigated against.
Navigating these kinds of challenges on your own, so we highly recommend consulting a family law trust expert before tackling any issues.
80 Year Shelf Life
One might think that a family trust is an indefinite part of family security, but did you know that thanks to the “rule against perpetuities”, most trusts only have a shelf-life of 80 years? This can prove to be a challenge as after the 80 year period, the trust will be automatically distributed among beneficiaries. In many cases, this will also trigger a capital gains tax which means that beneficiaries may end up owing a significant amount of money to the federal government.
Naturally, this can cause a great amount of anxiety to beneficiaries who don’t actually have the right to change the vesting date in the trust deed. This can result in arguments, disagreements and overall chaos amongst family members who may have not been around when the trust was initially set up and are now potentially in a situation where they owe the government a hefty amount of money.
We hope that this article has helped you understand some of the challenges that may arise with discretionary trusts or businesses set up under a family trust. However, if you need any assistance or are looking to set up your own family trust, we highly recommend contacting us to enlist the help of one of our experienced lawyers who will be able to guide you through the entire process.