Breaking Trust: Getting Out Of A Joint Trust

November 28, 2022
Man breaking free from chains

Family dynamics can be difficult at the best of times, but when it comes to managing wills and estates after someone dies, that’s when a person’s true colours can be revealed. Watch the series Succession (said to be based on the Murdoch family), and you’ll get an insight into how family affairs can get ugly when money is involved – no matter how much money is at stake. So, what if you need to get out and break up the trust?

Recently, a client approached us with this question: I am part of a family trust, but I don’t want to be tied to it after my parents pass away. Can I take my portion of the estate and remove myself from the trust?

CM Law takes a look at this topic in detail.

What’s A Trust? How does it work?  

A trust is a formal arrangement where a person or an organisation – known as the trustee – is required to hold or manage assets (such as money, property, a family business etc) on behalf of beneficiaries, usually family members.

This means the trustee makes decisions about the assets – for example, leasing out a property, managing upgrades like a second storey, choosing investment strategies for a share portfolio, adding more assets to the trust, distributing assets etc.

They are also responsible for the administrative aspects of a trust. This includes obligations such as completing tax returns, paying tax liabilities, undertaking financial reporting, and keeping formal records. It’s a complex undertaking.

In a family (or discretionary) trust, the trustees are usually the parents, and the beneficiaries are their children or other family members.

Trusts are often set up to take advantage of tax benefits, to protect the assets, or to provide for family members who are dependant or are unable to manage the assets.  

The trustee is responsible for determining which beneficiaries receive the income from the assets and how much they receive. They must act in the best interest of the beneficiaries.

How Is The Trust Managed?

Know the Rules

A trust deed is a legal document that sets out the rules of the trust. For example, what the trust’s objectives are, who can be a member, how long the trust will be in place, how the income and assets will be distributed, and so on.

The trustee follows (or administers) the rules of the trust deed. There can be one or more trustees.

Under NSW law, a trust deed can be set up for a specific period (say, a person’s lifetime) or remain in place for up to 80 years. This is its ‘vesting period’, also known as liquidating a trust.

What Happens To A Trust When The Trustee Dies?

The trust deed should include a clause about what happens in the event a trustee steps down or passes away. In some cases, the trust deed sets out that, should someone die, the trust will reach the end of its term, also known as the ‘vesting date’.

However, if that clause doesn’t exist, this is accommodated under NSW legislation (the Trustee Act 1925 No 14). A new trustee can be appointed where a trustee dies, as well as for other reasons such as a trustee remaining out of NSW for more than a year without having properly delegated the execution of the trust, staying out of NSW for more than 2 years, or being unfit to act.

The remaining trust members can appoint a new trustee.

Are Family Trusts The Same As Wills And Estates?

Living will or Trust

No. If the trust does not ‘vest’ (or wind up) upon a person’s death, the assets continue to exist without interruption, and the income continues to be distributed on a timeframe that’s in line with the rules of the trust deed (usually annually).

When a trust reaches its end (‘vesting date’), the beneficiaries become entitled to all the assets and income. These are distributed by the trustee in line with the terns of the trust deed.

Wills and estates, however, distribute assets after a person’s death, and in line with their personal wishes. This means their beneficiaries receive the assets after the estate has been settled, and not according to a specific timeframe. 

Do I Have To Be A Part Of The Trust In Order To Inherit?

In order to inherit under a trust, you need to be a part of the trust itself. You can inherit via other ways, such as a will, but the assets under a trust are separate. If you’re not in the trust, you won’t have access to its assets.  

Can I Take Out My Portion And Leave The Trust?

Taking a portion of pizza

The trust deed rules set out the ways in which the assets can be distributed (or ‘vested’). If the trust deed allows, a trustee can wind up the trust.

If the trust deed vesting timeframe is fixed, it may be possible to end the trust under specific conditions, for example, if all the assets can be fairly divided and there’s no negative impact to one or more beneficiaries.

If you’re thinking of leaving a trust, it’s critical to speak to a specialist legal firm like CM Law to determine what your options are.

What If Other Trustees Disagree With My Decision?

This is likely to end up in tears at the very least. Most likely, it will end up in court and become an expensive exercise. Get professional legal advice to make sure your interests are taken care of.

What Is The Process? When Do I Need My Own Lawyer?

The process is complex, and it’s advisable to use a lawyer who will act in your best interests. Call CM Law, and we’ll be by your side during this challenging time.

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