Misunderstanding Trusts

I come across a lot of clients who don't understand trusts at all Some of the major misunderstandings are:

Thinking a trust is an 'entity'.

A trust isn't an entity, it is not a legal person and cannot enter contracts. A trust is just a relationship between 2 parties, the trustee and the beneficiaries. To make things confusing for tax purposes the trust is treated as a separate tax payer, similar to a partnership.

Thinking trust assets are your own assets.

You might be a trustee or control a trustee but the assets of the trust do not belong to you. You must not mix trust assets with your own personal assets. Don't get the rents from a property owned by a trust put into your personal bank account – this could be a breach of trust and you could be sued by another beneficiary plus you are greatly weakening asset protection.

Death

When you die you cannot will trust assets. So don't include them in your will. If you do this could cause costly court cases such as in Smtih v Public Trustee NSW SC from a few years ago.

Since trust assets are not your assets and the trust will continue after your death you must consider the control of your trust after your death. 90% of the clients I see have no idea what happens to the trust after they die. Read your dead and you may find that the executor of your will can become the next apppointor. In the Smith case above it was the Public trustee who become the Appointor – and the first thing they did was to sack the trustee and put one in that they controlled.So make sure you have a will in place. Even if you have a will it could still be someone you had not contemplated that takes control of the trust. Many people say they will be executor and then bow out because they don't want the job. A better way may be to amend the deed, if need be, and put in back up appointors. The back ups can then take over if you die. And make sure you tell the back ups about this as I had a client whose mum and dad died and he was the appointor of the trust for about 6 years before he found out!

Watch out for loans to and from the trust as if the trust owes a person money and that person dies the executor will need to get that money back. This can lead to the executor suing the trustee to get money back into the estate so that they can give it back to the person who controls the trustee because he is a beneficairy under the will. And I have seen this happen! Unpaid present entitlements often result in these sort of problems.

And READ THE DEED. It is amazing the number of trustees or directors of trustees that have never read the deed. If you haven't read the deed then how do you know what you are doing is lawful. For example if you allow the trust to mortgage property and this power is not in the deed then you will have breaches your duties as trustee and you would be personally liable to the trust for this.