Tying in your will with your family trust

Tower Trust tells you how to avoid some estate planning problems by tying the contents of a will together with a family trust.

Friday, February 16th 2001, 3:50PM

When establishing your family trust you normally end up with the trust owing to you, as the settlor, a loan (often considerable) which is normally forgiven over the years at the allowable rate, which is currently $27,000 per annum. The objective is to reduce the loan owed to you to a nil balance. Generally at this stage the assets previously owned by you are protected by virtue of being owned by your trust.

Unfortunately many people do not reach the position of completely gifting away their loans. The most common reasons being an untimely death or setting up their trust too late in life to give themselves enough time to complete gifting in full. An example would be that a 75-year-old placing $540,000 worth of assets into a trust, would require 20 years of gifting at $27,000 per annum to reach a nil loan balance. Unfortunately not many of us can expect to attain 95 years of age.

Many people have not completed their gifting programme when they die. Upon death the loan owed becomes an asset of their estate and is dealt with in accordance with the terms of the will. If there is not a clause in the will forgiving any loan owed by the trust then there can be unnecessary problems faced by the trustee or trustees of the family trust. The reason being that the executor of the will may have to request that the trustee or trustees of the family trust repay to the estate the outstanding balance of the loan.

Sometimes the family trust will have insufficient cash assets to repay the loan. Imagine the problems faced should the major asset of the family trust be a residential home occupied by family.

Should the beneficiaries under the will be different from the beneficiaries of the family trust and there be no clause in the will forgiving the loan owed by the trust, it is possible that the residential home will have to be sold so that the loan can be repaid.

All of this can be avoided by obtaining professional advice when having your will prepared.

If you have a family trust it is recommended that you do the following in regard to your will: -

Name the trustee or trustees of your family trust as the executor or executors of your will. This way the "left hand knows what the right hand is doing".

Have a clause in your will forgiving any loan owing to you by your family trust. This relieves the need for your family trust to repay any debt to your estate. Therefore, the assets of your family trust will remain undisturbed.

It is also recommend that you prepare a letter to the trustee or trustees of your family trust expressing your wishes as to when and how you would like the assets of your family trust distributed following your death.

Your will and your letter to the trustee or trustees of your family trust should be considered "as a whole" to ensure that your wishes are met.

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