There is not much in life that you can ‘set and forget’, including the trustee of your trust.
In Australia, discretionary or family trusts are often used to hold investment assets or to operate small or medium businesses. They offer benefits in terms of asset protection, estate planning and tax efficiencies and are generally intended to have a long shelf life. As such, over time there may be a need to change the trustee of the trust. To help you decide whether the current trustee of your trust is appropriate or whether you need to appoint a new trustee for your family trust, we have put together this short guide.
What is a trustee?
A ‘trust’ is not a ‘legal entity’ (such as a company) but a ‘legal relationship’ between at least two parties: namely, the trustee and a beneficiary. The trustee holds the ‘legal’ ownership of property and must own and use the property for the benefit of the beneficiary. A trustee may be an individual(s) or a company.
The rights and responsibilities of a trustee are largely governed by the ‘trust deed’, the document drafted upon the creation of the trust that sets out the rules which govern the trust throughout its life. It is this deed that sets out how a trustee is appointed and removed. How straightforward the process is will depend on the drafting of your trust, some older trusts may not make this process easy. In some cases, trust deeds do not allow for the change of trustee, and it may be necessary to follow the process set out in the Trustee Act of your State or Territory or to apply to the court for an order allowing the change.
Why should I change the trustee of my trust?
There are many reasons why you may wish to change the trustee of your trust, including:
- Capacity: If the current trustee is an individual who is ageing or facing health issues, it is wise to consider changing the trustee to ensure a smooth transition of control and decision-making within the trust.
- Divorce: If your former spouse is a trustee of your trust, upon separation or divorce, it may be necessary to remove your ex as a trustee (the reverse may be appropriate if you marry).
- Asset Protection: If you’re concerned about protecting the trust’s assets from potential creditors, lawsuits, or legal claims, you may need to change the trustee of your trust to a person or entity who is less vulnerable to these sorts of claims.
- Succession: When an individual trustee dies and a new trustee is appointed, ownership records and registrations of all the trust assets must also change. Appointing a corporate trustee that cannot die avoids this logistical nightmare.
- Business Ventures: If your trust holds assets related to a business, you may consider changing the trustee to someone with expertise in that industry or to a corporate trustee, which can simplify business operations and provide continuity. We always recommend getting advice on the best business structure for your circumstances before making any changes.
- Geographic Relocation: If the current trustee relocates to a different state or territory within or outside of Australia, you may wish to appoint a local trustee who can effectively manage the trust’s affairs. Note that the law in some States in Australia requires the trustee to be geographically located in the State.
- Conflict of Interest: If the current trustee has a conflict of interest that compromises their ability to act in the best interests of the beneficiaries, a change in trustee may be necessary to eliminate conflicts and maintain trust integrity.
- Desire for Professional Management: Family dynamics or a lack of expertise may lead to the decision to appoint a professional trustee, such as a corporate trustee or a legal or financial expert, to manage the trust more effectively.
- Compliance and Legal Changes: Changes in trust laws or regulatory requirements may necessitate a change in trustee to ensure that the trust remains compliant with the latest legal and tax regulations.
- Estate Planning: As part of your overall estate planning strategy, you may wish to change the trustee to align the trust’s structure with your broader estate planning goals and objectives. One of the critical things you may be considering is how the trust will be controlled after you die. The role of the trustee will likely play a pivotal role in the strategy you adopt.
When contemplating a change in trustee, it is crucial to adhere to the procedures and guidelines outlined in the trust deed. This ensures compliance with the trust’s amendment powers and prevents unintended resettlement of the trust.
Resettlement occurs when an amendment is of such magnitude that it fundamentally alters the trust’s nature. If, according to the terms of the trust deed, replacing the trustee is deemed a substantial change capable of affecting the trust’s core structure, then a resettlement takes place. As a result, the previous trust effectively terminates, and a new trust is established. It’s important to recognise that resettlement can have significant implications, particularly in relation to Capital Gains Tax and state duty obligations
Aside from resettlement concerns, if you intend to change the trustee of your trust, it is important to ensure that the trust deed actually allows your intended trustee to be appointed. Some trust deeds prohibit the appointment of a person or company in one than more role, or the trustee may be restricted from benefiting under the deed.
How we can help
Andreyev Lawyers can advise you whether it is appropriate to change the trustee of your trust and how to do so. We can draft all the necessary documents to ensure any changes in trustee are both compliant with the trust deed and with relevant State/Territory or federal laws as well as lodge any necessary documents.
The information contained in this post is current at the date of editing – 12 October 2023.