In Nevada, a battle is brewing that highlights the fallibility of family trusts. Earlier this week, legal proceedings began in the case of media tycoon Rupert Murdoch, worth an estimated US$20.3 billion, who is seeking to alter an irrevocable family trust in order to maintain control of his media empire, which includes Fox News and News Corp. He’s chosen Nevada as the site of this drama, a state where it’s possible to legally change irrevocable trusts. Murdoch has to prove that changing the conditions of the trust will benefit all heirs.
Murdoch, 93, wants his eldest son, Lachlan, to control the trust through the redistribution of voting shares. He hopes that by giving Lachlan sole control, he can ensure the conservative agenda at his media holdings will continue. The other beneficiaries—three of his other children, some of whom openly support Democrats—disagree.
Although the court proceedings have not been made public, the high-profile case illustrates that trusts can be challenged. And that is a reality that has played out in Canadian courtrooms in recent years, too.
A number of high-profile Canadian families have gone to war over control of a trust, says Margaret O’Sullivan, managing partner, O’Sullivan Estate Lawyers in Toronto. “For many Canadian business families—the Stronachs, the Rogers family—a lot of that came back to the same basic issue: Who’s going to be in control?”
That may have some Canadian families who have used trusts as an estate planning tool rethinking things.
“There’s no such thing as an airtight trust,” says Matthew Rendely, partner, state litigation, Loopstra Nixon LLP, in Toronto. He says that disputes concerning trusts are common and frequently centre around whether a trustee is following the terms of the trust or isn’t using proper discretion as to how assets in the trust are being distributed.
“These instruments are only as effective as the people who are given the responsibility to manage them,” says Rendely. “No drafting of the terms of the [trust] will make it infallible to a judge’s oversight.”
Rendely says that in Ontario, the province’s Court of Appeal recently clarified what constitutes a trustee’s absolute discretion (their ability to act on their own judgement)—what the limits are, and what evidence they need to present to justify their distribution of funds in the trust.
He says that because a trustee is given control over an asset and is charged with the responsibility of distributing funds they believe are in the best interest of the beneficiary, if they choose to award a beneficiary no money—or fewer assets than they’re requesting—a judge will take a harder look at what evidence warrants such a move, says Rendely.
This is to prevent beneficiaries from influencing trustees, especially if another beneficiary is seen as unworthy of the funds. “[Other beneficiaries] will say: ‘Don’t let him just blow it and waste it on fast cars and drugs and parties,” says Rendely. “And if the trustee says to that beneficiary/family member, ‘I’m not giving it to you, because you’re going to blow it,’ then a judge has to decide if there is actual evidence—and if the trustee exercised proper consideration.”
Best practices in drafting trusts
Setting up a family trust can be a powerful way to protect assets and reduce taxes (including probate fees). A trust allows someone to transfer assets—be they investments or real estate holdings—to a trustee to hold and use for selected beneficiaries.
A trust is a relationship. It’s essentially a trade-off
A trustee is appointed to manage the trust according to the wishes of the person who set it up. Most trusts are established while the individual setting up the trust is alive, and are discretionary, meaning the trustee who is chosen to manage the trust can make decisions on who receives money and how much. Non-discretionary trusts dictate exactly how much each beneficiary should receive and for what purpose.
“A trust is a relationship,” says Rendely. “It’s essentially a trade-off, as you’re giving up control of an asset in order to essentially maximize a taxable benefit.”
Although trusts aren’t foolproof, steps can be taken to help improve its chances of success:
Carry out due diligence. Meeting with an accountant and/or a tax lawyer can help families decide whether setting up a trust is the best route to take. “A lot of people should do the calculations as to whether the tax savings that come with the loss of control is actually as worthwhile an exercise as they think it could be,” says Rendely.
Choose a trustee wisely. “The trustees have a lot of power,” says O’Sullivan. “Think long and hard about who you pick to be your trustee,” Rendely tells clients. “You don’t want to pick someone that’s ultimately going to come into a conflict of interest when carrying out their role.” Rendely adds that many times clients opt to elect their lawyers and accountants as trustees. However, that can become problematic. He says it’s important to weigh whether the selected trustees will be able to discharge their duties to all of the beneficiaries and “will be answerable to the ultimate successor of the business.”
Go pro. Considering a professional trust company is a good option for families, says Rendely. Although these firms have high upfront costs, he believes that their neutrality and professionalism reduces the risk of costly litigation for breach of duty down the road.
Craft a trust carefully. There’s no perfect way to draft the wording in a trust, says Rendely. He says being too descriptive can lead to too much rigidity with regards to the distribution of assets, while too little detail may leave too much to chance. In the Murdoch case, “perhaps a simplistic approach was taken in drafting the actual terms that did not preserve enough flexibility—and the family dynamic changed,” O’Sullivan speculates. She says that incorporating letters of wishes (documents that provide guidelines to trustees on trust matters) when using discretionary trusts can help to ensure that the goals of the person who set up the trust are carried out.
Ultimately, families should work closely with an advisor to ensure there’s a lot of communication, clarity and trouble-shooting.
“Generally, in these situations,” says O’Sullivan, “the key is not letting things get to the point where there’s a battle for control.”
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