Beware!! Who is the appointor of your family trust?
A family trust can be an important, if not critical, determinant of your livelihood especially if it is your main source of income. It therefore follows that you should be aware of not just your rights under a family trust, but you also need to know how your trust works and who is in control of it.
In particular, it is important to pay attention to the person who is the appointor of your family trust. Many people make the mistake of only paying attention to the identity of the trustee which means they often ignore who the appointor is.
Why is the appointor important?
It is true that a trustee’s role is important, because they legally own the assets of a family trust and they also have broad discretionary powers that allow them to choose who to distribute the trust income to.
However, did you know that the appointor has the power to ‘fire’ the trustee and find a replacement trustee?
On that view, this probably makes the appointor’s position more important than the trustee as the appointor ultimately controls who is in power. It is therefore critical to ensure the appointor is the right person.
Who should be the appointor?
It is usually common for the primary beneficiary of the family trust to be the appointor.
However, an appointor can also be the trustee themselves. If this happens, a future or ‘successor’ appointor can be determined. This means that when the trustee dies, the successor appointor becomes the appointor of the trust.
If the desired successor appointor is under 18 years of age, then an independent person or a trusted advisor could be made an interim appointor until the desired appointor reaches 18 (or a later desired age).
Note that some people choose their spouse or a distant relative to be their successor appointor.
However, the below example will illustrate why this may not be a good idea.
Example of a nightmare scenario
Suppose Megan runs a successful business through her family trust. She is the trustee of the trust. The trust deed says that if she dies, Bob, who is her ex-husband, becomes the new appointor of the trust.
Though her will says that all her assets are to “pass to my five children equally”, her 5 children learn that almost all her assets are held in the family trust. Therefore her children will not inherit much under the will.
The worrying part is that Bob, as the new appointor, can appoint himself (or a company he controls) as the new trustee. This is not a good situation – the children are at the mercy of Bob exercising his discretion in their favour before they receive a distribution from the trust.
Instead, what should have happened was that, when Megan divorced Bob, Megan should have arranged for the appointor clause in her family trust to be amended so that her children would be named as her successor appointors.
(But this would only have been possible if the trust deed gave Megan, as trustee, this power.)
You can now see why it is so important that the appointor of the trust be carefully thought out; you may not want the appointor to be someone you do not really know or no longer share a relationship with as they may appoint themselves as the trustee of your family trust.
If you are looking to establish a Family Trust or have more questions about a Family Trust, our experienced accountants and lawyers at The Quinn Group can assist you with all your requirements. Contact us today by submitting an online enquiry or call us on 1300 QUINNS (784 667) or on +61 2 9223 9166.