Monday, April 12, 2010

Trust cloning is dead (or is it?)

On Friday, a lawyer in sole practice and I caught up in relation to reviewing a purported trust clone.

As many of you will know, we have been fortunate (particularly in recent years) to do an ever increasing amount of work with suburban and regional lawyers who effectively use us as their external resource in areas where they do not have the time, energy or skills to otherwise assist.

Here the initial query was for the lawyer directly and in particular whether he had prepared documents for a client that satisfied the relevant trust law rules about how a trust cloning must take place. As it turned out, everything was fine on this point and similarly from a tax perspective, the transaction had been validly implemented prior to the tax rule changes on October 31, 2008.

What had not been resolved however was the way in which the transfer of assets between the two trusts was accounted for. In particular, the lawyer had crafted the documentation so that the consideration paid was the amount notified to the parties by the accountant.

As no notification had yet been made, we caught up with the accountant and quickly determined that there could be four possible alternatives, namely:

1. Nil.
2. $1 (or some other nominal amount greater than nil).
3. The historical cost base.
4. The market value.

Each of these four alternatives had quite dramatically different consequences both from an accounting and tax perspective and Friday's meeting was a timely reminder of the need for a truly collaborative approach between the various professional specialists on behalf of the underlying client.

Until next week.

Matthew Burgess