‘There is also a risk that if there is no valid default or gift over provision, then the assets of the trust pass on a resulting trust to the settlor. This outcome is at best problematic, particularly given that the settlor is often an unrelated third party such as an accountant or lawyer.’ (extracted from an earlier post)
The debate about whether discretionary trusts need provisions that detail how assets will be distributed in the event of a trustee failing to make a decision is longstanding, and arguably unresolved.
For those wishing to avoid being the subject of the next test case to resolve the issue, the conservative view appears to be that the lack of a default provision for capital means the trust may be held to be void. If this is the case, the invalidity will be deemed to be from the date of creation of the trust, however only if the trustee fails to make a determination to distribute all of the capital on or prior to the vesting day.
While it is often possible to amend a trust deed to insert a default provision for capital, this amendment can potentially result in capital gains tax and stamp duty being payable on the gross assets of the trust – generally an unacceptable risk.
Specific advice should always be obtained, however practically the approach adopted is often as follows:
- continue to use the trust for the assets that it already owns;
- take all reasonable steps to ensure that the trustee exercises its discretion prior to the vesting day to distribute the capital of the trust to any of the named beneficiaries;
- where possible (once the lack of a default provision is identified), ensure that the trust does not acquire any further assets; and
- if the group wishes to acquire further assets within a trust structure, a new trust should be established ensuring that it has none of the technical deficiencies the problematic trust deed contains.
** For the trainspotters, the title of today's post is riffed from the Cold Chisel song 'Forever Now’.
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