Law Talks Episode: Acting as a trustee of a discretionary trust? Here’s what you need to consider

Robyn: Good morning and welcome to another edition of 4CRB’s law talks and today we have joining us from Attwood Marshall Lawyers, Wills and Estates Associate Natalie Comerford. Thanks for being here, Natalie.

Natalie: Thanks for having me, Robyn. It’s great to be here.

Robyn: Well, our topic today is about one of the more complex tools people can utilise in estate planning. That being a discretionary trust, which is one of the most common forms of trust used by many Australian families. Now this might sound a bit technical, but it’s something many people have, in fact, recent figures released by the ATO suggests that there are close to one million trusts in Australia controlling more than $3 trillion dollars of assets. So, to start us off, Natalie, can you explain to us what is a trust?

Natalie: Okay. Well, to begin with, a trust is a relationship that’s created when one person or more, known as the trustee holds and manages property for the benefit of another person, who we refer to as the beneficiary. So, within these structures, the trustee holds the legal title to the property and is responsible for the daily management and decisions about the property.

So, the beneficiary or beneficiaries, because there can be more than one, has an equitable interest in the property, meaning they should be benefiting from it.

Robyn: Hmm.

Natalie: So, a trust is not a separate legal entity like a company. Instead, it’s a legal relationship created that’s recognised and can be enforced by law. So there are many different types of trusts to suit different situations and goals, but essentially in Australia, the discretionary trust is quite popular.

Robyn: Okay, so what is different about a discretionary trust and why are they popular?

Natalie: So, a discretionary trust is a type of trust where the trustee has the discretion to decide how to distribute the trust, income or capital among the beneficiaries.

So, unlike other types of trusts, such as a fixed trust where beneficiaries have a certain entitlement so they know exactly what they can expect from that trust, the discretionary trust awards quite wide powers to the trustees to get to decide who gets what.

It’s important to note that as estate planners, we predominantly deal in what we refer to as testamentary discretionary trusts.

So, what that means is that we create discretionary trusts within wills that only come into action after the will-maker passes away. So ideally, they sit there and they lay dormant until the will-maker’s death.

Robyn: So discretionary trusts are certainly powerful tools, and I know we have talked about them before. So, I’m interested to know more about this trustee and what it is that they actually do.

Natalie: Okay. So, the trustee can be a single person, it can be a group of people or an entity like a company.

And the trustee, as I said before, holds the legal title to the trust property and their responsible for managing the assets in accordance with the terms of the trust deed. And this is all done for the benefit of the beneficiaries.

What this means is that basically it’s the trustee’s job to oversee the trust assets. They can make decisions about the distribution, and they have to ensure compliance with the terms of the trust deed and also uphold any legal obligations of the trust itself.

So, they’re kind of like managers really. Trustees have a fiduciary duty, which means they’re legally required to act in the best interest of the beneficiaries, even above their own interests.

Robyn: It sounds like a big responsibility. Can there be more than one trustee or is it usually just one person.

Natalie: So, if you appoint a company as the trustee, then the director or the directors of the company will be responsible for making decisions on behalf of that company. If you’re using people, for example family members or professionals like lawyers or accountants, then there can definitely be more than one trustee appointed to manage a trust.

In Queensland under the Trusts Act 1973, you can have up to four trustees, so having more than one can be a good idea for checks and balances, but it also requires clear communication and cooperation amongst the trustees.

The right number of trustees is unique to each case, and this is where a lawyer will provide legal advice about the best way to structure the trust to align with the client’s goals for the trust.

Robyn: What happens if a trustee decides they no longer want to continue acting in the role? Can they step down?

Natalie: The short answer is yes, trustees can resign and be replaced, so there are a number of reasons why a trustee may decide not to continue to act or even sometimes unexpected life events occur which prevent them from acting.

The details of how and why and when a trustee can either step down or be replaced or cease acting should be addressed within the trust deed.

It’s usually like resigning from a job. You need to provide written notification and there always has to be at least one other trustee or corporation to continue managing the trust.

So, the trust deed will usually provide provisions for appointing and removing the trustees. If it doesn’t, you’ll definitely need to seek legal advice to navigate this process properly.

Robyn: Well, let’s talk about the actual responsibilities of a trustee. What are the key things they’re expected to do?

Natalie: So, trustees have several significant responsibilities. So firstly, acting in the best interest of the beneficiaries. Being a trustee is what we call a fiduciary position. So, this position means that you’re making a commitment to act in the best interest of the beneficiaries, rather than acting in your own best interest.

This also means that they must avoid any conflict of interest and always prioritise the beneficiaries needs.

Secondly, managing trust assets and this includes tasks like maintaining properties, investing funds wisely and ensuring incomings and outgoings are properly accounted for.

Another important duty is deciding on distributions. Trustees determine how and when to distribute income or capital to beneficiaries. This often involves balancing the needs of different beneficiaries, taking into account where they are in life and just being aware of the purpose of the trust.

So next I would say record keeping and reporting, trustees are obligated to maintain detailed records of all transactions and in some instances may need to provide reports to beneficiaries.

There’s also the compliance side of the trust as they as they come with specific taxation obligations such as tax returns. It’s not uncommon for trustees to engage other professionals from time to time to obtain legal or taxation advice.

Following the trust deed is very important. The trust deed is essentially the rule book, and trustees must ensure all decisions align with the terms outlined in the deed.

And I would say probably dispute resolution. The reason being conflicts can arise amongst beneficiaries and trustees may need to mediate and resolve issues fairly.

Robyn: So, speaking of disputes, could you share an example of a situation where a trustee might face a challenge?

Natalie: Certainly, a common example is when beneficiaries have differing needs or expectations. Imagine a trust set up for a family, and one beneficiary wants a lump sum to start a business, while another prefers regular income payments.

The trustee has to weigh these requests against the trust’s objectives and long-term sustainability of the trust as well.

So, their task is to not only make the best financial decisions on behalf of all the beneficiaries, but to also maintain neutrality and balance. Sometimes difficult decisions need to be made. When choosing trustees, you need to be thinking like an employer and really think about who would be the best person for the job handling these situations diplomatically while sticking to the terms of the trust is key.

Robyn: Now here’s a question I think many listeners might have, can trust assets affect a trustee’s Centrelink benefits?

Natalie: That’s a great question. Trust assets can be counted towards trustee’s means testing for Centrelink benefits under the Social Security Act 1991. However, it’s not always straight forward, and just because they can be counted doesn’t mean they will. There are very specific rules, exemptions and tests that apply, so it’s important for anyone in this situation to get tailored legal and financial advice to understand how trust assets might impact their specific circumstances.

Robyn: So, Natalie with all these responsibilities that we’ve just been discussing, what should someone consider before agreement become a trustee?

Natalie: Okay, first and foremost, they should understand the level of commitment involved. Trustees take on significant legal and financial responsibilities, and they’re accountable for their decisions. So, it’s crucial to consider the dynamics among beneficiaries, sometimes being a trustee can put you in a challenging position.

Finally, seeking advice before accepting the role can help clarify what’s involved, and it could just ensure that they’re prepared and have got the tools to manage any situations that may arise.

Robyn: It sounds like being a trustee is not a role to take lightly. What’s your advice for someone setting up a discretionary trust and choosing the right trustee?

Natalie: My advice is usually individual to each case, but some overarching comments I always lean towards would be to choose someone trustworthy, impartial, and financially savvy.

It may be a family member, friend or even a professional trustee. A beneficiary can also be a trustee as well.

So thought has to be given to the right number of people, or even if a trustee company would be a better option, and of course have a clear and comprehensive trust deed, it’s the foundations for how the trust will operate.

Robyn: Great advice, Natalie. Now, before we wrap up today, is there one key takeaway you would like to leave our listeners with?

Natalie: Yes, I’d say discretionary trust are an incredibly useful tool for estate planning, but they require careful management. So, whether you’re setting one up or acting as a trustee, getting professional guidance is essential to ensure the trust operates smoothly and achieves its goals.

Robyn: It certainly is a complex area and as we always say, ensure you get professional legal advice. Thanks for joining us today.

Natalie: Thanks for having me, Robyn.

Robyn: You’ve been listening to law talks here on 4CRB, which you can hear every Friday morning from 9 o’clock.