Family trust minefield: Learn from the rich
There has been considerable publicity over the past six months about a dispute between Gina Rinehart and her children over a family trust set up by her father, Lang Hancock. There has also been publicity about litigation instigated by Solomon Lew, in relation to his family trust, as a result of his children's estranged spouses' Family Law property claims. Ironically, the Rinehart family dispute first came into the spotlight because of Gina's attempts to keep the details confidential.
How did it come to this? And what lessons can be learnt?
A family trust has traditionally offered a number of advantages, including:
- tax effectiveness;
- continuity;
- a method of smoothly passing wealth from one generation to the next with minimal tax and legal implications;
- confidentiality: there is no public record of trusts, their assets or beneficiaries;
- control without ownership;
- ability to have most of the powers of a direct owner of the assets, without the following disadvantages:
- paying tax on all income;
- exposure to creditors and bankruptcy trustees;
- exposure to Family Law property claims.
(Many of the above protections from disadvantages are nowadays partial only.)
Most people who control a family trust do so as trustee (often through a corporate trustee). In practice, many regard the trust as "mine", and tend to do whatever they want first and tell their advisers later. This may appear to work fine, year after year (even if not all of the rules are followed precisely), as long as everybody in the family is happy. But human nature dictates that eventually someone might become very unhappy.
In the Rinehart family's case, disillusion became open warfare after a decision by Gina to delay the trust assets being distributed to the children. In the Lew family's case, it was marriage problems within the family which caused a crisis.
In both cases, the disputes have ended up in court and court proceedings are public, expensive and divisive.
All trustees, even ordinary people managing their "own" family trusts, are subject to a multitude of laws about what they can and cannot do. In situations like those above, every action over many years is open to scrutiny.
If arrangements like those creating the Rinehart and Lew disputes, which were made by the very wealthy, no doubt after careful legal advice, can lead to the courts, how much more can actions taken without proper advice by people with little, if any, knowledge of the minefield which is trust law!
It is important that all trustees are aware that they owe duties to all potential beneficiaries. The trust assets are not the trustee's own assets. Distributions, expenses and other payments, investment decisions, changes to who is the trustee or to any other aspect of the trust: must all be scrutinised before the action is taken, to ensure compliance with law. This is essential to protect the trustee against potential personal liability.