The use of corporate appointors in 2nd generation family trusts

Background

The appointor (sometimes called principal) of a family trust has the power to appoint and dismiss the trustee. The appointor is the ultimate controller of the family trust.

The appointor rarely has substantial other powers within a family trust and as such is only occasionally involved in trust management. This is generally if the family trust is being restructured for corporate, business, taxation purposes or for succession planning for generational change.

This article explores the concept of expanding the role of the appointors within a family trust and utilising a corporate structure for that appointor, particularly with respect to 2^nd or 3^rd generation family trusts.

Why use a corporate appointor?

Typically a family trust does not require a corporate appointor. The usual advantages of a body corporate when using them as a trustee or a business structure are not required for the role of appointor.  Those advantages might be summarised as:

1. perpetuity (provided the company is not inadvertently deregistered!); and
2. asset protection for the shareholders and directors of the company.

Practically, these advantages are unnecessary if the only purpose and activity of the appointor is to hire and fire the trustee once every couple of decades. The appointor does not trade, does not own property and has no liabilities in its role.

The ability to use corporate decision making processes is the key feature of an appointor structured as a body corporate. This can have practical benefits in the administration of a family trust for the 2^nd or 3^rd generation of the family when there are more people involved than just Mum and Dad.

If the appointor has broader scope of responsibility and takes on guardianship responsibilities as well within the trust, then the arrangement changes. In that instance a corporate appointor is certainly the best structure.  In essence, the use of a corporate appointor/gurardian will allow for the structural separation of operational managers and what becomes the board for the family group. The directors of the trustee are effectively the executive, and then the directors of the corporate appointor are the board.  In this situation the trustee is obliged to report to the appointor/guardian and seek the consent of the board of the corporate appointor/guardian for a variety of matters (as thought appropriate in the circumstances) which could include such things as:

1. annual distributions of income;
2. distributions of capital;
3. loans to beneficiaries;
4. addition or removal of beneficiaries;
5. decision to change major trust assets;
6. buying a business or winding up the trust;
7. appointment of new beneficiaries; and
8. variations of the trust deed.

In this way the family members who are not involved in the day-to-day running of the business, but effectively have a notional ownership in the family business, can supervise the family business through their role as one of the board of the corporate appointor/guardian.

The arrangement is usually tied together with a single guiding document called a “family constitution”.

The directors of the trustee have a much more hands-on role in the business and would therefore need to be remunerated appropriately. Whilst every family is different, some families decide that those directors, because they have sometimes a fulltime role in the business, would receive a salary and perhaps slightly higher distributions in the family generally.

The most difficult aspect of a family arrangement such as this is working out how to deal with someone exiting the business and family law events. There is also the issue as to whether family members are entitled to compete with the family business and use what might be considered family intellectual property (such as long-standing customer relationships) in their own personal business. Usually this is prohibited in the deed as it is considered to be family property rather than the property of any one individual.

A family agreement or family constitution must be prepared in a way which does not inadvertently constitute a variation of the trust. Such a variation could have stamp duty or capital gains tax consequences (CGT) (although CGT consequences are less likely).

In the case of Dagenmont^[1], a written agreement by a trustee of a discretionary trust to pay a particular amount of income to a certain beneficiary in future years was held not to be a fetter on the exercise of discretion by the trustee but instead a variation of the trust deed. This variation effectively varied the trustee’s powers as to future income and was binding on the parties.

Typically the situation in Dagenmont would want to be avoided. Therefore, the family agreement would set out a process for coming to decisions on distributions e.g. decisions the trustee may make by itself and what decisions need to be approved by the board of the corporate appointor.

The use of corporate appointors and family constitutions is on the rise in Queensland for 2^nd and 3^rd generation family businesses.

[1] Dagenmont Pty Ltd -v- Lugton [2007] QSC 272