Wills and Estate Planning Adelaide: Don’t Make These Common Mistakes with your Discretionary Family Trust

Discretionary trusts (often called family trusts) are very powerful planning tools you can use for all kinds of purposes. Trusts can simplify & minimise or even avoid probate, protect your beneficiaries from creditors or divorcing spouses andcan provide for education for grandchildren or your favourite charities.

When a trust is part of your overall comprehensive estate plan, you should try to avoid these common trust mistakes:

Mistake 1: Failing to title assets in the name of your trust

If you have not put your assets into your trust, also called “funding” your trust, you have lost some of the benefits of your trust.

Any assets that are in your own name at the time of your death will probably need to be probated. However, any assets that are titled in the name of your trust at the time of your death will avoid probate and usually result in lower after-death administration costs.

In order to receive the protection and benefits capable of being provided by the trust, generally (except for superannuation funds and certain annuities) most of your assets would need to be transferred into your trust during your lifetime.

Placing your assets in your trust means that all assets will be distributed according to the detailed instructions you leave in your trust, rather than in your Will. Having a trust but not putting your assets into the trust is like buying a brand new car, but not filling it with petrol: It looks great, but it does not go anywhere.

Mistake 2: Failing to update your trust

Many people regard their trust as a “set & forget” proposition, with the result that most trust deeds are signed and then put away in a drawer or safety deposit box, not to be looked at again for years. This can result in an estate plan that does not work as intended.

Trusts, like any other tool in your shed, must be kept sharp. Your trust should be reviewed at least once a year to make sure it still meets your needs.

There are many changes that can trigger an update to your trust. There may be changes in your personal life such as births, deaths, marriages or divorces. There may be financial changes in your life, such as job changes, retirement, major stock-market corrections, etc.

There also are tax and non-tax changes in the laws. The Government never fails to pass some changes to the tax act every year.

Mistake 3: Using form documents

Some people attempt to draft their own trusts by using forms found on the Internet or in legal software packages. Even some lawyers and accountants use “shelf-company” or forms-based documents. The forms-based trusts usually treat everyone the same.

You get what you pay for.  If you pay peanuts …

Mistake 4: Thinking your trust automatically protects you from your creditors

Most family trusts are not creditor-protection devices for the trust maker. This is because most trust deeds are drafted so you have full authority to change, amend, alter or revoke the trust and you have full access to the assets in the trust. But if you have full access to your trust assets, so do your creditors.  Similarly, assets included in your family trust may be available resources taken into account for Medicare and Centrelink purposes.

Properly drafted and funded trusts for both you and your spouse can, however, protect your trust assets from your spouse’s creditors and vice versa. A trust can also protect the assets you leave to your children from their creditors.

Mistake 6: Thinking that assets in a revocable trust escape estate taxes

Many Australians think that estate taxes no longer exist.  While there are no longer any formal Australian death duties, there certainly have been in the past, and there may be again in the future.  But in other parts of the world death duties are alive and well right now.  So the location of the assets, the place where the trust is established, the terms of the trust deed, the differing laws from time to time and place to place, and even where you live and die can all have a bearing on whether death duties will apply.

Furthermore, Capital Gains Tax may be regarded by some as a defacto estate tax, and this most certainly applies in Australia at present.  Upon your death, assets in a discretionary trust may in certain circumstances considered your assets in your gross estate for estate tax purposes.

Rod Genders is a senior Australian lawyer specialising in accident compensation and estate planning in Adelaide. His boutique specialist law firm is one of the oldest and most respected in Australia – visit it at www.genders.com.au . Rod is also a prolific author and speaker.  Some of his articles and books on Wills, Probate, Estate Planning and Trusts in Adelaide, Asset Protection and Retirement Planning may be found at www.genders.com.au/adelaide-lawyer-blog.