Section 3: Setting up a trust
There are many different kinds of trusts and a lot of things to think about before setting up a trust. This section aims to help you decide whether a trust is right for you.
The booklet ‘Special disability trusts – Getting things sorted’ provides detail on special disability trusts and how the new income support concessions can help families wishing to provide for people with severe disability.
The following information will give you a general understanding about trusts.
What are the basic issues with a trust?
A trust is a legal concept which involves arrangements which can look complex but are really quite simple.
A trust is a legal obligation placed on one person, called the trustee, to look after the assets of the trust for the benefit of another person or a number of people, called a beneficiary or beneficiaries.
Some people treat trusts with suspicion because trusts are often used to reduce tax. Trusts of this sort can be very complicated. This use of trusts means that tax rules affecting trusts can be difficult to manage.
However, it does not mean that a trust is unsuitable for providing for the needs of a person with disability.
In fact, a trust is a very good way to control assets for the benefit of a person with disability. A trust can continue to look after some of the interests of a person with disability after your death. It is a structure you set up to operate before or after your death, which can continue into the future.
If you have decided to use a trust to provide for a family member with disability, the main decisions that you will need to make are:
- Who will be the trustees?
- How will I divide up my assets to deal fairly with the person with disability and other members of the family?
- What accommodation and care options should I provide for?
- How much discretion and direction do I give the trustee?
These questions are discussed in this section.
What do trustees do?
There are established rules about the rights and duties of trustees and the rights of beneficiaries.
The nature of a trust is to separate the power to control assets from the right to benefit from those assets. Generally speaking:
- the trustee has the right within the guidelines set up by the trust to control and administer the assets, but only for the benefit of the beneficiary; and
- the beneficiary has the right to benefit from the assets, but not the power to control the trust assets.
The person with disability can therefore benefit from the assets without the risks involved in having direct control over the assets. These risks include:
- exploitation or abuse, if the person with disability is vulnerable;
- not making the most of the available assets; and
- what might happen to the assets after the death of the person with disability, especially if the person with disability is not able to make a will.
Example
Jeannine sets up a trust for her assets. Her nephew Sam will control it as trustee for the benefit of her son Ben, who has disability. It will be Sam’s decision whether and when to use the trust money. Ben can ask Sam for money, or other people (such as other family members or care workers) can ask on Ben’s behalf.
Sam can use trust money for Ben’s benefit even if Ben doesn’t ask for help. It will be Sam’s decision how to invest money: whether to invest mainly for the long term or to keep some or all of the money available for Ben’s needs, depending on what Sam thinks Ben’s needs are likely to be.
How is a trust set up?
If you are establishing a trust to operate while you are alive, you need to have a trust deed prepared. The deed is a legal document which:
- identifies who is the founder of the trust, who is the trustee and who benefits from the trust (called the beneficiaries);
- provides details of how the assets of the trust are to be used for the beneficiaries; and
- sets out the various powers of the trustees.
You can also set up a trust through a will so that the trust will not begin until after your death. You could do this by writing it into your will or by referring in your will to a separate document containing the full terms of the trust.
Before setting up a trust, you should get appropriate legal and financial advice. Using a trust deed (for example, the sample special disability trust in the booklet Special Disability Trusts – Getting things sorted) may not work for your particular circumstances.
Who should I appoint to be the trustee?
The appointment of a trustee is probably the most important decision you will make when setting up a trust for a person with disability.
Legal structures do not ensure people will do the right thing. Therefore, choosing people who will do the right thing is extremely important.
The trustee is the person who will make decisions in your place, so you should ensure that they understand and share your views about how your family member can best be looked after by the trust. Your trustee should be someone who will make decisions consistent with your wishes, so far as you can foresee.
For example:
- If you believe that the available funds should be distributed in a generous way and take into account all aspects of a person’s life, it may not work to have someone as trustee who does not believe that it is important for people with disability to have holidays, or to have a TV or CD player. (If the trust is a Special Disability Trust, it can only pay for care and accommodation.)
- If you believe your family member with disability should live as independently as possible, it may not be a good idea to appoint a trustee who thinks people with disability should live in an institution or a group home.
So the first consideration is choosing a trustee who is sympathetic to the needs and wishes expressed by your family member with disability, to your vision of the future, and to your approach to the issues that matter to you. If you involve others in your vision and planning, as discussed in Section 1, it is more likely that you will have identified a person who is suitable to be a trustee. If you have developed a ‘wish list’ for the person with high support needs, this can assist the trustee to continue to make decisions in the best interests of the person. You may also wish to have more than one trustee.
However, there are also other features to bear in mind which it may be useful to have in a trustee.
- Youth: if the trust is to last for the lifetime of the person with disability, it is sensible to appoint a trustee of roughly the same age as the person with disability. They are then more likely to be around for as long as the person with disability.
- Business sense: if a person can understand business and legal or financial advice, they may be a good choice as a trustee. Their skills will enable them to look after the trust effectively over a long time.
- Independence: ideally, the trustee will have no conflict of interest which might cause the trustee to look after his or her own interests, or those of the people close to him or her, rather than the interests of your family member with disability.
Example
An expectation of inheriting any money not spent on the person with disability could give rise to a conflict of interest: the less spent on the person with disability, the more the trustee inherits in the long run.
An involvement in an organisation which provides accommodation for the person with disability could give rise to a conflict of interest. The trustee’s position with the organisation might override the interests of the person with disability if there is an issue about where the person should live or a complaint against the organisation.
Choosing trustees who are independent provides a useful safeguard to ensure that they serve the best interests of the person with disability.
- An interest in the person with disability: it is very important to have a trustee who knows the person with disability, is in regular contact with him or her, and is well aware of his or her needs and interests. A trustee who relies on second-hand information about what is needed will not be as well prepared to administer the trust. The trustee needs to keep up to date with changing ideas and knowledge about how best to support the person with disability.
- Compatibility: if there is more than one trustee, the trustees need to get on well with each other. Any serious dispute among trustees can end up in court, and it is highly desirable that this doesn’t happen.
Having all these qualities is the ideal; however, it is not essential. It may be difficult to find one person with all these qualities. Some of these qualities may be more important to you than others. You may want to choose more than one person as a trustee so that you have a combination of qualities to best suit your needs.
Who could be a trustee?
These are the options for appointing trustees, and some of the pros and cons.
- Family members: the brothers or sisters of the person with disability are of the same generation and usually have a close interest in the welfare of their sibling. They are therefore a natural choice as trustees. However, family members may have a conflict of interest because they often stand to benefit from whatever funds are left over after the death of the person with disability.
This is not to say that many family members would not ‘do the right thing’ in all circumstances, but it is an issue to think about. Many parents say they trust their children but don’t know whom they might marry. Expectations of family members as trustees should be discussed within the family to avoid problems.
A possible conflict of interest is a reason why you might balance a family member as a trustee with someone more independent. Aunts or uncles or cousins of the person with disability may be more independent because they are less likely to have a future financial interest. Family members are less likely to charge fees for their services than other potential trustees. (If the trust is a special disability trust, immediate family members cannot be paid for their services.)
- Friends or other people involved in the life of the person with disability: friends often have a close interest in the life of the person with disability without having any conflict of interest. They may therefore be good trustees, or one of a number of trustees, providing a useful balance. Encouraging a strong network of people around your family member with disability may provide good candidates for trusteeship later on (or could mean that the informal network will be sufficient without setting up a trust).
- The Public Trustee or private trustee companies: the Public Trustee in each state and territory, or private trustee companies, can provide trustee services and are very experienced at doing so. They can be expected to have an objective view about what will be beneficial in any circumstances and substantial financial ability.
The Public Trustee and trustee companies will charge fees for their services (this may be money well spent for the advantages that they bring) and do not have any close personal interest in the person with disability. They will rely on other people providing information as a basis for deciding where to use the available trust funds. This means that the trustee companies will be more remote, especially if there is no other trustee actively involved with the person with disability.
Contact details for the Public Trustee agencies in each state and territory are provided in Section 5 of this booklet.
- Professional advisers: your lawyer or accountant may be another candidate as an independent trustee, but they are likely to charge for their services and may not have any direct involvement in the life of the person with disability or knowledge of disability issues.
- Corporate trustees: your advisers may recommend that you should set up a company to be the trustee. In that case, the considerations about who should be a trustee will apply to the people who will be directors of that company.
Considering these various candidates, it is sometimes necessary to make difficult choices and there may well be no right answer.
How many trustees can I appoint?
You can appoint more than one trustee to get a spread of skills and abilities. For example, you could appoint as trustee a family member who has regular contact with the person with disability and also appoint a trustee company which has the financial capacity to look after the trust assets and will be around for the life of the person with disability.
Or you could appoint three individuals who provide the different qualities that you need and also may keep each other honest about advancing the interests of the person with disability.
Example
Margaret has an intellectual disability and needs help managing money. Her mother, Christine, considers whom she can appoint as trustees.
Margaret’s brother, Paul, takes a close interest in Margaret, and Christine is confident that he would always do the right thing for Margaret, even though he will receive anything left in Margaret’s trust after Margaret dies. However, Paul is only 20 and not very good with money himself, though Christine thinks he will mature as he gets older.
Christine’s sister Julie gets on very well with Paul, and Christine thinks she would be a good balance to Paul as trustee.
Christine’s accountant, Bruce, has also been involved in planning her financial affairs to ensure Margaret’s future is well looked after. Christine also considers him as a trustee.
She decides to appoint all three because of the mix of independence and close involvement with Margaret. She also thinks they would get on very well together and feels it is worth paying Bruce for his professional time.
There is no limit on the number of trustees you can appoint but, from a practical point of view, more than three is not desirable.
The advantage of three trustees over two is that any disagreement can be resolved by the majority (only if the trust deed or will allows this) so there is no deadlock.
What if the trustee dies or can’t accept the appointment?
You can specify in the trust deed or the will who can appoint extra trustees or replacement trustees. This will often be one or more of the trustees themselves. If a situation arises where there is no trustee, the Trustee Acts in each state and territory specify who is to take over, and if those provisions don’t work the courts are given the power to appoint trustees.
To ensure that the trustees are people of your choosing (so far as you can), it is important to specify who the replacement trustees will be or how they are to be appointed.
Some important practical issues when setting up a trust
There are two general issues to bear in mind in setting up a trust.
- If you are setting up the trust while you are alive, can you afford to put assets into the trust? That is, can you do without those assets in your retirement? Once given to the trust, you will not have the power to control those assets in future or have them back for your own benefit. They will have been committed to the benefit of the person with disability.
Example
Silvio and Anna want to provide for their son Marco who has disability. They are retired and have a house and some money from their super. They think they will go to live with their other son Tony, sell their house, then put the money in trust for Marco. They see a financial adviser who points out that, if for any reason they can’t stay with Tony at some future time, they will have a problem: they will not be able to get the money out of the trust for their own use, so they may not be able to afford other retirement housing.
They might decide to set up the trust for Marco now but not put much money into it. Their adviser tells them about the costs and paperwork involved in operating a trust, which they need to balance against the feeling of security they will get from having set up the trust now and knowing that they have done the best they can for Marco.
They decide instead to keep the money in investments in their own name, just in case they ever need it, and to put money into trust for Marco through their wills, after both of them have died.
- Trusts do not create options which do not otherwise exist. While setting up a trust structure may be beneficial, this depends on either you or others having assets which they are willing to put into the trust for the benefit of the person with disability. The powers of the trustee are limited to the assets within the trust. Appointing a person as trustee for a person with disability does not give that person any rights in the nature of guardianship or financial management with respect to any assets directly owned by the person with disability.
Example
James has disability because he was badly injured in a car accident and he is unable to work. He owns his own home and has a reasonable amount of money that he saved before the accident. James is able to manage most of his own affairs with assistance from his sister Susan.
Susan decides to establish a trust for James and appoints her daughter Sarah as trustee. Sarah wants to protect James, as she is concerned that he is being exploited.
Being trustee of James’ trust doesn’t give Sarah the right to control James’ personal assets. The options are to work with James to help him protect his own money or to apply to the Guardianship Tribunal in the relevant state to have a financial manager appointed for James (which could be Sarah or someone else) to control his money.
How do I divide my assets between family members?
If the person with disability is your only child, this will probably not be a big issue: you can give your whole estate to your son or daughter, via a trust or your will, without concerns about competing claims.
However, if the person with disability is one of a number of children, parents and other family members need to consider carefully how they look after those other children as well as the person with disability.
Usually, the general structure will be:
- establish how much will go to each child of the family;
- put the share of the person with disability into trust (now, or through your will); and
- include a provision for assets still held by the trust, when the person with disability dies or no longer needs the assets, to go to other family members or to a charity, or whomever else you consider appropriate.
Deciding how to divide your assets between family members can be a very difficult question that depends on matters such as:
- what assets are available to divide – the more there is, the easier it will be to balance everyone’s interests;
- what assets the person with disability owns in their own right and what income they are likely to receive in the future;
- what accommodation arrangements have been made for the person with disability and how secure those arrangements are;
- whether your house, often the main asset, needs to be kept for the person with disability;
- social security considerations, including the possibility of changes to the social security rules in the future;
- possible changes in services available for people with disability, government or private, in the future;
- whether you need to provide additional resources for the person with disability and postpone the interests of the other children until the person with disability has died or otherwise no longer needs the support of a trust; and
- the needs of other people in the family, such as younger children who need to complete their education or adult children who also need support.
Giving most of your assets to a trust (for your son or daughter with disability) could result in a very long delay before your other children benefit. Much will depend on whether they are well established and providing adequately for themselves or whether they need assistance. Different people will resolve these problems in different ways: again, there is no right answer.
For some parents, the best solution is to give more to their son or daughter with disability because their needs (or uncertainties as to their needs) are greater and they have less opportunity to provide for themselves compared to their other children. Even if a person with disability has what appears to be secure accommodation, if these arrangements change it may be necessary to fund accommodation privately, which can be very expensive, so creating a reserve fund for this could be a priority. Paying support costs to supplement government funding can also be very expensive.
Other parents feel that equal division is the right thing to do, to be fair to everybody: the disability is not a reason for one child to get either more or less. Some parents decide to give a larger share of their estate to the other children if the child with disability has appropriate housing that is likely to continue to be available into the future.
Your decisions might change at different times as your circumstances change.
Example
Alex and Rita have two children: Anne, 12, and Peter, 15. Peter has an intellectual disability. It is hard to determine what arrangements Peter will need. If anything happens to Alex and Rita while Anne is still young, Anne will also need support to finish her education. Alex and Rita decide to split their estates equally and to appoint trustees to look after Peter’s share and also to appoint trustees for Anne’s share (who can use the money to pay for her education) if she is less than 21 when Alex and Rita die.
Ten years later, Alex and Rita reconsider their wills. Anne is now well on the way to being independent. Peter is living in a group home and this seems likely to continue indefinitely. However, Alex and Rita feel that, as Peter might have a greater need for funds in the future if his housing arrangements ever have to change, it is appropriate to now give him two-thirds of their assets.
There are too many possible arrangements to go into more detail here. What will suit your vision and circumstances is a matter for careful consideration when preparing a will or setting up a trust. Appropriate legal and financial advice can help you to look at your particular situation.
It is important to openly talk through these issues with everyone concerned (including the person with disability so far as possible) and arrive at an agreement as to what will happen. This will ensure that there are no surprises for anyone after your death. If there is a conflict within the family and you need help with resolving this, you can get support from the Family Mediation and Counselling services available in each state and territory.
Under the Family Relationship Services for Carers initiative, funding has been provided to deliver mediation and counselling services to help parents and other family members reach agreement on the private provision arrangements, and to assist families to resolve family conflict and negotiate a settlement in the best interests of the whole family.
For more information go to Section 6.
How do different forms of accommodation fit into this?
Currently there is a huge demand for accommodation for people with high support needs. The options are limited and they are often very distressing for families to consider – for example, long term care in nursing homes, hostels and disability institutions.
States and territories are introducing changes, in response to the needs identified by people with disability and their families, to provide more appropriate options for people with disability. There is no ‘one model fits all’; the best way is to provide a range of accommodation options to suit each person’s individual needs. These options include independent living with some advocacy; sharing with another person, with or without disability, with support as needed; independent accommodation with each state/territory Department of Housing with individual 24-hour support; or remaining in the family home with advocacy and support as needed.
Some families are looking at providing sustainable accommodation for their family member by exploring with other families a model where resources are pooled to provide appropriate shared living arrangements. There are a number of very small family developed and managed organisations which are using innovative methods to develop accommodation options for their family members with disability which blend both informal and formal support.
When looking at how a trust supports accommodation options, it is important to understand that creating a trust, either while you are alive or through a will, does not create new resources. To have reasonable certainty as to the accommodation available to a family member with disability, you need to make these arrangements yourself so that they are ready when the need arises. It is also important however, to leave the trustee with enough flexibility to respond to the person’s changing wishes and needs, and to new ideas about how to best support people.
For people with an intellectual disability who are ‘in the system’, with accommodation provided by a service organisation or government which is likely to continue to be available, this issue might seem to be resolved. However, there is always the possibility that the situation may change in the future. For example, the current accommodation may no longer be suitable in 10 years time or the service organisation may close down or change how it provides services.
For parents whose son or daughter with disability still lives with them at home, the issues will be about continuing to provide care as the parents get older. However, a sudden change of circumstances may arise when the parents die and the person with disability needs to move into strange new accommodation.
Organising access to whatever form of accommodation is appropriate and available is a very important step. It can be good to do this before the trust or will comes into effect. You will need to give the trustee(s) the power to obtain whatever form of accommodation is suitable, with guidelines as to what you would like to happen if it is feasible.
You may need available assets for:
- insurance, rates, maintenance and other expenses related to housing; and
- the necessary care and support services.
There is no point in providing housing for the person with disability if the means do not exist to keep that housing or to support the person with disability staying there. If there is insufficient money available for these things, your arrangements will not last and assets may have to be sold to fund the purchase of something more appropriate. The money to pay expenses might come from income from a trust or from the money of the person with disability, such as earnings, savings or social security payments.
Support or care services will often cost a lot of money, especially if services may be needed for many years. If you intend to provide for these expenses through your will or a trust, you will need to consider the likely costs and plan finances to cover such services for maybe 30 or 40 years. Private funding of these services in full will be impossible for many people as they will not have sufficient assets to cover the cost. They will have to consider the services available through government or non-government organisations and consider what contribution they can make to get the best arrangements they can afford.
Special disability trusts
To assist families with estate planning, the Australian Government has legislated to provide social security and veterans’ affairs means test concessions, where specific conditions are met, for certain gifts and for trusts known as special disability trusts. Anyone can establish a special disability trust for a principal beneficiary with severe disability as long as the legislative conditions are met.
The focus of the special disability trust measure is to encourage people to make their own provision for accommodation and care costs for family members with severe disability. A special disability trust may help with this because the social security concessions may resolve concerns about how funds held in a trust may affect social security entitlements. However, if the assets available are small, so that reduction of social security entitlements is not a significant risk, a special disability trust may not be relevant. For detailed information on special disability trusts refer to the booklet Special Disability Trusts – Getting things sorted.
Can my trust arrangements or my will be challenged?
When you are trying to balance the factors considered above, there is also a background issue to consider: the possibility that a close family member who feels unhappy about the way you decide to divide things up may challenge your decision after your death by disputing your will. This may still be an issue if you set up a trust to operate while you are still living rather than doing it through a will. Transactions undertaken before you die can sometimes be challenged and set aside as part of a challenge to a will.
If you decide to leave a large share of your assets to your son or daughter with disability, other children may argue that you have not made proper provision for them. Even if you leave your estate to your children in equal shares, one of your children could still make such a claim. Claims of this kind can result in expensive court proceedings, and the legal proceedings are typically paid for by your estate.
There is no way to be absolutely certain that your will won’t be challenged. The best approach is to discuss the issues and agree within the family how the future needs and desires of the person with disability will be managed. Discussing the issues within the family, and if possible with other key people in the person’s life, will assist all family members to reach agreement on acting in the best interests of the person with disability.
If you would like to talk to someone about disagreement or conflict in your family, you could access the Family Mediation and Counselling Services. Contact details are provided in Section 5 of this booklet.
Your legal adviser may prepare an explanation of the reasons why you have divided your estate which can be included in your will or a separate document. This may reduce the likelihood of a challenge.
However, providing properly for your family member with disability is an important matter. The possibility of a dispute about it should not stand in the way of doing what you think is right. After you have carefully considered the options with the benefit of professional advice, the fact that other people will be unhappy about what you do should not stop you making the arrangements which seem the best to you. If there is a dispute, the executor of your will can try to resolve it without the estate spending a lot of money on legal expenses.
Should I set out in detail in the trust what I want to happen?
You can include much or little detail as to what you would like the trustees to do for the person with disability. If you specify what the trustees must do, there may be problems if circumstances change in ways you did not think about.
You cannot foresee all the possible situations the trustees will have to deal with, 20 years or even 10 years in the future, because there are too many unknown factors. In setting up trusts or wills, you can only do the best that you can with the resources and information available.
It is generally desirable to give a lot of flexibility to the trustees to enable them to have full and free decision making power in whatever situations might arise. Providing them with guidelines about how you would like things to work for the person with disability will enable the trust to provide flexible solutions rather than being too rigid.
You have to strike a balance to control the actions of the trustee to a reasonable extent and at the same time not being overly detailed. You can do this by giving some general guidelines in the trust deed or will about how the trustees should go about their duties. The deed or will can say that the welfare of the person with disability must be the paramount concern of the trustees. That is, it is not the trustees concern to save money for whoever will receive what is left in the long run. The guidelines can express the general policy you want them to follow and tell them who they must consult.
This booklet does not go into the pros and cons of how trusts are taxed; however, there is some information in the booklet ‘Special Disability Trusts – Getting things sorted ’. This is a matter for specialist legal and financial advice. Details about how to find a lawyer are included in the back of this booklet. Each of the law societies in the states and territories can provide you with information about practitioners who specialise in wills and estates.
How do I pass on everything I’ve learned about the needs of the person with disability?
Too much detail doesn’t fit easily into a will or trust deed, especially if the detail may change. One way around this is to prepare information to be given to the trustees to assist them with their task outside the trust deed or will. This could be the written account of all the things you know about what is good or bad for the person with disability and how they communicate their needs and wishes: activities which the person likes or dislikes, what they can and can’t do for themselves around the house, what support they need to participate in activities, medications and therapies, who provides services to them and so on. You can change it and update it as things develop.
While this information, and your preferences on various subjects, will not be legally binding on the trustees, it will be invaluable for helping the trustees to do the best for the person with disability. Of course, your family member with disability will often be able to say these types of things for themselves, to a greater or lesser extent, and that too is something which the trustees should be directed to take into account.