Trust distributions and the Domazet decision – it’s a miracle !**

Domazet is arguably, one of the highest high profile trust vesting-related cases. As usual, if you would like a copy of the decision please contact me.

The factual matrix in board terms was as follows.

The original trust was set up in the 1970s, named here as the No. 1 trust.

Many years later there is a desire to distribute to another trust (named here as the No.2 trust). The No.1 trust was set up in the 1970’s. The No.2 trust set up in the 2010s - in other words, many years later.

The provisions in the trust deed for the No.1 trust provided that distributions to another trust as beneficiary were possible, as long as the receiving trust ended before the vesting date of the No.1 trust.

Here, No.1 trust, or the trustee and its advisers assumed that the vesting date of the No.2 trust would be 80 years.

The reason they assumed that is because the Australian Capital Territory (ACT) had at one point introduced the statutory 80-year perpetuity period and the No. 1 trust was established in the ACT.

It was therefore assumed that the legislation applied. The problem was that they had misunderstood the way the statutory limit had been implemented.

In particular, each Australian jurisdiction implemented the 80 years statutory limit at different points in time. The adviser for the No.1 trust was Queensland-based.

The Queensland legislation had come in before the No.1 trust was set up. So, they just assumed that would be the case in the ACT. In fact, the ACT legislation came in after the No.1 trust was set up.

They then amended the No. 2 trust to ensure it ended with 80 years of the No. 1 trust being set up.

What this meant in the practical sense was that when the distributions took place, the No.2 trust in fact had a vesting date after the No.1 trust because the No. 1 trust did not with certainty have an 80 year life.

This was a big problem because it meant that distribution was void according to the terms of the No. 1 trust.

What that meant was that the No.1 trust would be assessed, as if there was no trust distribution at all, which triggers a flat rate of tax of 48.5 cents. To the extent there were any capital gains, the 50% general discount would also be completely ignored.

Next week's post with consider some possible solutions given the factual matrix here.

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 Culture Club song 'It's a Miracle’.

View here:

A 101 tip on changing (everyday)** trustees

A regular theme in previous posts is how critical it is to ensure that the provisions of a trust instrument are followed precisely when taking steps in relation to the trust.

The SMSF related case of Moss Super Pty Ltd vs. Hayne [2008] VSC 158 is one example of this principle, in the context of a change of trusteeship.

In summary:

1. As is becoming increasingly common, there were issues around the rightful controller of the SMSF following the death of one of the members;
2. The surviving member purported to change the trusteeship of the SMSF, so that a company of which she was the sole shareholder and director would be appointed;
3. The trust deed set out the process by which a change of trusteeship could take place and specifically required the ‘founder’ to appoint any new trustee;
4. While the sole director of the new trustee company was also the founder, she did not in fact sign the change of trustee documentation in the capacity as founder;
5. In other words, while she signed as the sole director of the new trustee, there was no provision where she also signed under the founder role; and
6. Critically, the court found that, as was the case here, legal structures are created where individuals had multiple roles to play, the requirements around those roles must be respected and complied with.

In many respects, the decision reflects a number of analogous situations in the context of family trusts including the case of re Cavill that has been featured previously.

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

** for the trainspotters, the title today is riffed from the Culture Club song ‘Changing every day’.

Listen hear (sic):

Time** (to be challenging a BDBN)

Previous posts have considered various aspects of BDBN.

The case of Wooster v Morris [2013] VSC 594 provides another example of some of the key issues around the enforceability of a BDBN.

In summary:

1. A husband and wife were the trustees and members of an SMSF;
2. The husband had two adult daughters from a previous relationship;
3. The husband had made what was ultimately accepted to be a valid BDBN to his adult daughters, who were also the executors of his will;
4. The husband's wife, following his death, sought to challenge the BDBN on the basis of a technicality that the trust deed required it to be delivered to her and she claimed that it had not been;
5. Practically, as the wife was the sole surviving trustee and was able to regulate the appointment of the new trustee (ignoring the claims of the daughters as executors of the will), she paid the entire death benefit to herself; and
6. After a drawn out (and expensive) litigation, the wife was required to return all funds and also contribute personally to the costs of the litigation.

While there are obviously many consequences that flow from this decision, perhaps the three most important are:

1. despite many cases to the contrary that require the provisions of a trust instrument to be followed precisely in order to ensure validity, there will be exceptions to that rule;
2. unless otherwise provided for in the trust instrument, the executors of a deceased member's estate will not automatically have any legal entitlement to a role in the control of an SMSF; and
3. who has practical control of an SMSF can be critical, regardless of the strict legal position (or in other words, possession can often equate to 9/10ths of the law).

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

** for the trainspotters, the title today is riffed from the Culture Club song ‘Time (clock of the heart)’.

View hear (sic):