OPINION: Passing on your worldly goods can be complicated - your will may not get you your way!
Many people who have settled family trusts fail to recognise that the will does not deal with the assets which are in the trust: it deals with assets that are owned personally but it does not control how assets which are in a family trust will be distributed to others.
Succession is one of the most interesting topics in finance: how and when we want our assets to go to the next generation is full of individual differences. It is not just important for those with a lot of assets (farms, businesses and those with big investment portfolios) because the emotional aspect of succession of assets from one generation to the next means that mum's old china teacup can become as important as a 1000-hectare farm.
Nor is succession a topic only for older people: unfortunately perhaps, we never know when the next generation will succeed to our assets because we usually do not know when we are going to die. Even quite young people (especially those who have life insurance and/or children) need to think about succession.
In some respects, working out a good succession plan is relatively easy in New Zealand: we have none of the estate duties or inheritance taxes that drive the complicated arrangements that are found overseas.
However, there is one thing that complicates succession in New Zealand - the abundance of family trusts.
Not only do we have a great number of family trusts in this country but there is a great deal of misunderstanding as to how the family trust fits in with the will. A family trust can be a useful part of a succession plan but what it owns and when and how its assets will be distributed need to be thought through.
Assets which are in a family trust are owned and controlled by the trustees of the family trust and your will cannot dictate to these trustees what will happen to those assets.
Your will says what is to happen to your personal assets but it has no control over family trust assets.
This means that if you own a business personally but have the house in a family trust, your will directs the succession of the business but it is the family trust's trustees (whoever they are after your demise) who control what will happen to the house. If your will says that the house should go to your eldest daughter, this will have no effect if the house is owned by the family trust.
Family trusts are discretionary and the discretion as to what will happen to trust assets lies completely with the trustees. You may decree what you like in your will about the assets that you own, but your will cannot compel trustees of the family trust to give to any beneficiary in particular - that is at their discretion and they have the right to decide who will benefit, by how much and when.
While you are alive this is not usually a problem. Most settlors of family trusts are also trustees and are able to influence or control who will benefit.
However, on your demise this is no longer possible (fairly obviously). And so the remaining trustees and/or new ones who are appointed under your will, take over the complete discretion that is given under the trust deed. Beneficiaries (probably your children) have the right to be considered for a benefit but have no rights to receive a benefit from the family trust. A will is quite definitive as to who will receive certain assets but a family trust leaves that to the discretion of the trustees.
There are two things that you can do about this: first, appoint good (trustworthy) people to be trustees of the family trust. This is done by your will and these should be people who know you very well and who will be able to exercise the discretion as you would have wanted.
Second, write a letter of your wishes so that the replacement trustees know what you would like to happen to the trust's assets. Although this is not legally binding on the trustees, they are most likely to follow your wishes if they can.
A myriad of different family circumstances means there is no universal succession template and so each of us needs to work out exactly what we want to happen to our personal assets and family trust assets when we die.
This is an area where open family discussions and good professional advice are critical.
Martin Hawes is an authorised financial adviser. A disclosure statement is available on request and free of charge, or can be found at martinhawes.com. This article is of a general nature and is not personalised financial advice.
- Sunday Star Times