Can trusts last forever now? **

Following on from recent posts it is useful to understand that the majority of Australian jurisdictions decided that a life in being plus 21 years was too complicated. Instead, the rule was replaced with a statutory provision which allows up to 80 years as the maximum length of trust in Australia.

As mentioned last week, there are exceptions to this rule. In relation to discretionary trusts, the highest profile exception is in South Australia where the rule has effectively been abolished.

Another exception is in relation to superannuation funds.

Superannuation funds are simply a form of trust instrument, although a highly regulated form of trust due to the Superannuation Industry Supervision Act which imposes a whole range of specific rules.

In relation to the core of the underlying structure of a superannuation fund however, it is simply a trust structure. Importantly however there is no concept of an ending period. In other words, in theory superannuation funds can last forever.

There are obviously tax issues for self-managed superannuation funds meaning maintaining the structure indefinitely may not be a particularly smart idea. However in the context of trust vesting, superannuation funds are a clear and obvious exception to the vesting rules.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For trainspotters, ‘Forever now’ is song by legendary Australian band Cold Chisel from 1982.

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Trust deeds and default provisions – (Forever) Now:** who wants to be the test case?

We have received some feedback about the following comment in a recent post, namely:

‘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:

1. continue to use the trust for the assets that it already owns;
2. 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;
3.  where possible (once the lack of a default provision is identified), ensure that the trust does not acquire any further assets; and
4. 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.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Cold Chisel song 'Forever Now’.

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Star Hotel** - When two wrongs make anything but a right

Last week’s post considered one of the leading cases in relation to a failure to follow the specific requirements of a trust instrument when appointing a beneficiary.

In that case, the failure to validly appoint a beneficiary caused significant difficulties due to subsequent purported distributions of income to the party.

In summary, it was held as follows:

1. The attempted distribution of income to an invalidly appointed ‘beneficiary' is a nullity.
2. On this basis, the distribution can be set aside as void ‘ab initio' – in other words, the distribution itself is taken to never have occurred (this aspect of the decision relied on an earlier case of Re Cavill Hotels Pty Ltd [1998] 1 QdR 396.
3. Where a purported distribution of income fails, the entitlement of valid potential beneficiaries will depend on the relevant original distribution minute initially.
4. If the relevant distribution minute does not address who receives a failed distribution, then the default provisions, if any, under the trust instrument will apply.
5. The ability for any default clause under a trust instrument to operate effectively will depend upon whether they do in fact trigger a distribution within the relevant income year. As profiled in an earlier post, some trust deeds do not operate effectively in this regard.
6. 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.

Practically, a trustee would need to reimburse the trust (or each underpaid beneficiary) to the extent of the invalid distribution from their own assets.

Trustee Exposure also potentially extends to other losses, for example overpaid income tax that may have become unrecoverable from the Tax Office (eg due to being out of time).

While in theory the trustee would be entitled to recover amounts it personally compensates the trust for from the overpaid beneficiary, practically if that beneficiary does not have assets, recovery attempts may fail.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Cold Chisel song 'Star Hotel’ – inspired by the Cavill Hotels case mentioned above.

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