The Might of the Trustee: Exercise of discretionary powers by trustees of family trusts
We're back! So, we've discussed in general terms the powers of trustees. This week Allawdocs looks specifically at how trustees of family trusts should exercise their discretionary powers.
Family trusts are one of the most common types of discretionary trusts. They are used to hold assets and income and distribute them among family member beneficiaries. Common features of family trusts include that:
- the trustee is often a trust company;
- the trustee has wide discretionary powers to distribute trust income and capital; and
- the beneficiaries are an immediate family (though other extended family members may be included).
A trust becomes a family trust by an election on the trust's tax return. The election specifies a 'primary beneficiary' to whose family distributions of income and capital can be made.
A family trust trustee's discretionary powers
As noted previously, a discretionary trust gives the trustee discretionary powers relating to:
- managing trust assets; and
- discretionarily distributing trust income and capital to beneficiaries. This power to distribute money is known as a "power of appointment".
The trustee is required to at least consider exercising its discretion(s), and failure to do so is a breach of its duties.
How should the trustee exercise these powers?
As with all trusts, the trustee's actions will only be valid if it is within the powers conferred by the trust document.
Allawdocs family trust deeds give significant discretion on the trustee for the distribution of trust monies, so that the income and capital on trust can be distributed in a way that best suits the circumstances of the family. This allows trustees to effectively achieve the purpose of the trust.
When exercising its discretion, the trustee of a family trust should consider:
- the circumstances at the time the power is to be exercised;
- the needs and circumstances of the beneficiaries including their tax positions and financial aspirations;
- whether a particular grant to a particular beneficiary is appropriate as compared to the other beneficiaries; and
- why the trust was created, if determinable, or the applicable circumstances surrounding the trust's creation.
The breadth of discretionary power accorded to trustees of family trusts can make exercise of the discretion a tad more complex. Trustees (not just of family trusts!) are also guided by legal duties that they owe. Stay tuned - more on that next time!
The Allawdocs trust deeds cover off on all these issues, giving the trustee the widest powers to exercise its discretion without creating absolute rights in favour of any beneficiaries. If desired, it is also possible to appoint a guardian to oversee the trustee in certain situations.
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