Creating a trust: Critical matters every founder must document
Founders, families, business owners, and professionals seeking to preserve wealth across generations have often opted to do so through trusts.
Trusts became the preferred option because they offer a range of benefits, including ownership continuity, asset protection, succession planning, and flexible family wealth management.
Trust founders are likely to focus on ensuring the trust is created through a valid legal document and rarely take a wholesome approach to establishing a system or rules that will govern the trust once it is created.
The assumption is often that a trust document drafted by a competent lawyer will achieve the founder’s objectives automatically.
In reality, trusts rarely have a “one size fits all” approach because each family has its own intricate dynamics that should be documented differently.
A problem area for one founder may not be a cause of concern for the another.
Typically disputes arise in the governing of trusts because the founders never adequately considered the tough questions and documented what would shape the trust’s future long after they are gone.
During the drafting process of a trust deed, a lawyer cannot anticipate or resolve disagreements about fairness, control, succession, or family values if those matters have never been expressed by the founders.
Therefore, founders and their families should take the time to reflect on several critical questions before the drafting stage begins.
Should the trust be revocable or irrevocable?
One of the first matter founders must document is whether to make the trust revocable or irrevocable. A revocable trust comes with it the power to revoke or amend the trust, allowing founders to adapt the trust to changing family circumstances. However, caution must be given to founders retaining excessive powers which may undermine the intended asset protection and succession planning benefits of trusts.
An irrevocable trust, on the other hand, offers greater certainty and stability because the Trust deed can only be changed in limited circumstances, if at all. This in turn however can limit future generations from adapting to changing conditions.
Who benefits from the trust, When and how much?
While this may seem like an obvious question, it is often one of the most contentious and sometimes the most difficult one for founders to answer and put on paper. There are several considerations a founder may encounter when deciding upon their beneficiaries, which include among others:
· When a beneficiary should have access to trust assets and benefits
· how much should each beneficiary be entitled to.
· When minor beneficiaries should have access to trust funds and assets.
· Whether an equitable distribution is more appropriate than an equal distribution because of the different financial dispositions of beneficiaries.
· Whether family members who actively contribute to a family business or wealth creation stream should receive greater benefits than those who do not.
· What circumstances, if any, would disqualify a beneficiary from receiving benefits from the trust
Founders should have clear intentions from the outset which they express in the trust to minimise future disputes and unrealistic expectations from beneficiaries.
How much discretion should trustees have?
After selecting who the trustees of a trust should be, the next important matter a founder should document is how much power should be given to those trustees. Trustees are responsible for managing trust assets and making decisions in the interests of beneficiaries. Therefore, extent of their discretion can significantly influence the effectiveness of the trust.
If trustees are left with too much discretion it may lead to arbitrary decision-making or even perceived favouritism from the beneficiaries. On the other extreme a rigid trust deed that leaves trustees with minimal decision-making may affect their ability to respond the changing family circumstances or economic conditions.
It is imperative then for founders to ensure they find the right balance of power and discretion for trustees that reflects the founder’s vision and objectives for the trust.
How will the trust operate after the founders are no longer involved?
Trusts can operate smoothly while the founders are alive because they continue to provide guidance and leadership. Founders need to document how the trust will function after they are gone. The Board of trustees and its governing framework must be able to survive the founder. In order to do this effectively, it should be clear while the founder is alive, who will assume responsibility of managing the trust after the founder’s death, and how replacement trustees are appointed to ensure there that there is no governance gap. Founders may also want to consider the appointment of an independent trustee when they no longer there to ensure fairness in the management of the trust.
How should trustee decisions be made?
Decision-making mechanisms must also be considered by founders and documented during the drafting process.
Deciding whether trustees should make decisions by simple resolution, a special resolution or unanimously depends on the type of decision to be made and any other family dynamic situation that may exist or be anticipated to arise. Typically, routine administrative matters may only require simple resolution while major decisions tied to the trust assets or dissolving the trust entirely may require a higher threshold.
Overlooking these intricate details can result in unintended domination of one group over another or deadlock votes and it may stall progress in the governing of the trust.
Which assets should be protected from disposal?
Founders should consider and document in detail the which of their assets they want to enjoy special protection and whether trustees should be restricted from selling or encumbering them without enhanced approval requirements. Founders may view certain assets to hold sentimental or historical significance beyond their monetary value, which may not be the same for trustees or beneficiaries. Therefore, if preservation of family legacy assets is a key objective for founders, it must be addressed early on to avoid future conflict.
What happens if family relationships deteriorate?
No family anticipates conflict, but prudent estate planning requires consideration of less favourable scenarios.
Founders may need to ask themselves if beneficiaries can be excluded from future benefits or have benefits suspended in certain circumstances. If founders envisage situations in which a beneficiary may be excluded from the trust, those circumstances should be clearly documented in the trust deed. Equally important is the inclusion of safeguards to ensure that such powers are exercised objectively and not as a result of arbitrary or emotionally driven decisions.
The key here is to acknowledge that founders often wish to retain flexibility, while beneficiaries typically seek certainty and protection. A trust should accommodate both concerns in a balanced manner.
How should future generations be represented?
Founders of trusts that are intended to last for several generations after them must consider how the trust should be governed as the family grows. This entails deciding how family branches are represented and whether descendants should have participation rights and how future generations will be involved in major decisions. Having this set in the trust deed avoids family branch disputes and the need for extensive consultation with external advisors to resolve family disputes.
How BDO Zimbabwe can help
A trust deed is an important legal instrument, but it is only as effective as the thinking that informs it.
BDO offers holistic wealth and estate planning advisory services to ensure that founders carefully consider the key structural, legal, and practical aspects of their trusts at the outset of the establishment process.
For further information, please contact any of our specialists below:
Maxwell Ngorima
Tax Partner
+ 263 242703876
mngorima@bdo.co.zw
Natasha Munjoma
Legal and Compliance Executive
+263 242 703876
nmunjoma@bdo.co.zw
