If a trust deed cannot be found, commercially it can often be the case that the most responsible approach is for the trustee to wind up the trust. Indeed, there may be disgruntled beneficiaries or third parties that essentially force a trustee to adopt this course.
Any vesting of a trust is likely to trigger a range of revenue consequences, particularly taxation and stamp duty.
These revenue consequences normally arise where a positive determination is made by the trustee to vest a trust, the trustee will usually resolve to make one or more beneficiaries absolutely entitled to the assets (or specific assets) of the trust.
While not intended to be an exhaustive list, the revenue related ramifications of a trust vesting can include:
capital gains tax being payable on the increase in the value of any assets being transferred since the date they were acquired;
income tax being payable on non-capital assets, such as plant and equipment and trading stock;
stamp duty being payable on the transfer of the assets, to the extent they comprise dutiable property in the relevant jurisdiction;
additional tax, stamp duty and commercial costs being incurred to subsequently transfer the assets out of the name of the recipient beneficiary (if they want the assets then re-routed to a trust environment);
asset protection exposure for the beneficiary receiving the assets in the event they subsequently commit an act of bankruptcy;
considering the impact of the rule against perpetuities (which effectively prevents a distribution to another trust if this causes the assets to remain within a trust environment for more than 80 years); and
where an individual receives the assets, the need to update their estate plan to reflect the additional assets owned in their personal name.
If the vesting of a trust is being anticipated by the parties, many of the consequences above can be adequately managed through appropriate planning.
** For the trainspotters, the title of today's post is riffed from the Cure song 'Trust’.
As mentioned in recent posts, lost trust deeds can cause significant difficulties for trustees of family trusts.
In the context of SMSFs and other forms of fixed trusts with a narrow range of known beneficiaries (who can be proved via other evidence), a court application for adopting a new trust deed is generally seen as being unlikely to be necessary from a trust law perspective.
However, the federal court decision in Kafataris v DCT [2008] FCA 1454 highlights that even for trusts with an ostensibly narrow range of potential ‘beneficiaries’ care must be taken.
In this case a husband and wife established separate SMSFs appointing themselves as sole members. They declared a property owned by them as property of their respective SMSFs.
In considering who the ‘beneficiaries’ of each SMSF were, it was held that upon construction of the SMSF deeds, the class of beneficiaries was broader than each single member. This was because the trust deed allowed the trustee to pay benefits to the member’s dependants and even relatives (if there were no dependants, as defined under the superannuation legislation) of the member.
As such, the potential class of beneficiaries included 21 different people.
Best practice therefore dictates that each person who can enforce the due administration of the trust should be a party to and sign a deed of variation that seeks to implement a replacement for a lost SMSF trust deed.
As usual, please contact me 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 Sonic Youth song 'Kool thing'.
Recent posts have considered various issues in relation to lost trust deeds.
Due to the difficulties that arise when a trust deed is lost, the preferred solution is to locate the original deed.
The types of searches most likely to be successful in relation to locating a lost trust instrument include:
Former and or present banks, as trust deeds are often required to be produced to open accounts or enter into finance arrangements;
Past and present lawyers, including the lawyer who prepared the deed as they will often keep an original or copy of the trust deed for their own records;
Accountants, past and present for similar reasons as lawyers, they may have access to at least a copy of an original trust deed;
In some states, if the trust has ever owned real property it can be useful to contact the Land Titles Office, in that jurisdiction. It may be that the department will have retained a full copy of the trust instrument on the initial acquisition of the property;
This particular alternative is however not available in all jurisdictions. For example, New South Wales prohibits the disclosure of the existence of a trust relationship on title, so there will never be trust instruments with that department. The approach is also dependent on the exact practices from time to time of the relevant department;
Where none of the above pathways prove successful, there can be benefits in contacting the original settlor of the trust, particularly if they were not directly associated with the law firm that established the trust. Alternatively, other parties that have had any dealings with the trust from time to time should also be contacted. For example:
a beneficiary that is known to have historically received a distribution (or close relatives of deceased beneficiaries who are known to have received a distribution);
former trustees; and
parties who have held a position of authority with the trust, for example, appointors, principals, guardians or nominators.
As usual, please contact me 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 Hoodoo Gurus song 'I want you back'.
Recent posts have considered leading cases in relation to lost trust deeds.
These cases highlight the critical role ancillary documentation plays in supporting the existence of the trust.
While ancillary materials will not necessarily prove the existence of a trust, their absence when producing a purported trust deed is likely to be fatal to any court application.
In particular, to varying degrees, each of the cases profiled confirm:
Supporting documentation, while not of itself enough to establish the existence of a trust, will be critical to the prospects of success in any court application;
In many respects, the more relevant ancillary documentation available, the more likely that a court application will be successful;
If the supporting documentation indicates at least how the capital and income of the trust are dealt with, the court may advise the trustee to administer the trust according to those documents; and
Similarly, the more evidence that a trustee can bring demonstrating that it has discharged all duties in relation to a trust, other than ensuring security of the trust deed, the more likely that the court application will be successful.
As usual, please contact me 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 Guru Josh song 'Infinity'.
Recent posts have considered various issues in relation to lost trust deeds.
The decision in Chase v Chase [2020] NSWSC 1689 provides another useful summary of the key issues in this area.
In a situation where there was only secondary evidence about the possible existence of a trust, the court reiterated anyone wanting to have the court confirm the existence of a trust relationship is required to establish:
Clear and convincing proof of the existence and contents of the missing trust deed (as confirmed in the decision of Maks v Maks (1986) 6 NSWLR 34, as set out in an earlier post).
The '3 certainties of a trust', that is:
The identity of the beneficiaries.
The property the subject of the trust.
The nature of the trust (i.e. whether fixed or discretionary).
The court found the above tests had not been satisfied.
In particular, there was an absence of a declaration of trust, an absence of any document establishing the terms of the trust and a lack of coherent evidence of what the contents of any such documents were. Thus there was uncertainty as to the identity of the beneficiaries, the property the subject of the trust and whether or not the trust was fixed or discretionary.
The court also made comments about the potential application of the 'presumption of regularity', another concept featured in previous View posts.
This presumption states that where 'an act is done which can only be legally done after the performance of some prior act, the proof of the latter carries with it a presumption of due performance of the prior act'.
The court confirmed:
There are 4 key conditions that must be satisfied, before the resumption of regularity will be applied.
First, the matter must be more or less in the past and incapable of easily procured evidence.
Second, it must involve a mere formality or detail of required procedure in the routine of a litigation or of a public officer’s action.
Third, it must involve, to some extent, the security of apparently vested rights so that the presumption will serve to prevent an unwholesome uncertainty.
Fourth, the circumstances of the particular case add some element of probability.
Cross referencing the case of Burnside v Mulgrew; Re the Estate of Doris Grabrovaz [2007] NSWSC 550, it was confirmed that when considering the presumption of regularity, courts will draw a distinction between cases where “what is in question is compliance with formal requirements” as opposed to those involving a “substantive issue”, with the presumption potentially applying in cases of the former but not the later.
Thus here, unlike the cases mentioned in last week's post, where there was very little to support the existence of the trust, the presumption of regularity offered no assistance.
As usual, please contact me 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 Earth, Wind and Fire song 'Boogie Wonderland’.
Posts over recent weeks have considered leading cases in relation to lost trust deeds.
Another useful decision in this space is the case of Sutton v NRS(J) Pty Ltd [2020] NSWSC 826.
In this case, the trustee provided the court with what appeared to be a full photocopy of a trust deed, dated on establishment in 1972.
At all times all relevant parties had acted on the assumption that the photocopy was indeed a true and full copy of the original deed (which had been misplaced).
A financier for the trust operating under the 'know your customer' policy mandated production of the original trust instrument for sighting, to ensure the trust’s constituent documents were in order.
Given the trustee was unable to produce the original deed, the application to court was made, with part of the evidence also including a further photocopy of the deed that was located with the law firm who originally drafted the trust deed.
The court confirmed:
generally, in the absence of evidence to the contrary, it can be presumed from the taking of the action that the formalities have been complied with – that is, a presumption of regularity may apply to the effect that where an act is done which can be done legally only after the performance of some prior act, proof of the later act carries with it a presumption of the due performance of the prior act (see for example Harris v Knight (1890) 15 PD 170, and the case of Re Thomson [2015] VSC 370 where an unsigned SMSF trust deed was assumed to have been properly adopted, even though the relevant trustee had subsequently died).
In this case however, there was no need to prove by inference that any formality had been complied with - the photocopy of the deed was signed and the evidence established directly that the parties concerned had always acted on the basis that it set out the terms of the trust.
In this type of situation it was held that the Court should assist those responsible for the administration of the trust by ensuring that they can continue to administer it as if the photocopied deed was the trust’s constituting document.
The way this was achieved here was for the Court to formally order that the trustees of the trust were justified in administering the trust on the basis that the photocopy of the deed that was annexed to the Court order was a true copy of the original trust deed.
A similar outcome, based on a similar factual matrix, was also reached in the decision of The application of M & L Richardson Pty Limited [2021] NSWSC 105.
Similarly in Re Cleeve Group Pty Ltd [2022] VSC 342, it was confirmed that where there is a fully copy of the deed (even if unexecuted), there is either no need to prove the terms through ‘clear and convincing’ evidence, or, if there is, the terms of the draft documents provide that ‘clear and convincing’ evidence.
D R McKendry Nominees Pty Ltd [2015] VSC 560 provides another example of where a lost trust deed was accepted as being in the form of a solicitor’s usual pro forma deed. In contrast however, in Mantovani v Vanta Pty Ltd (No 2) [2021] VSC 771 (another case featured in View posts) in the absence of any evidence as to the terms of the deed, the schedule alone was held to be insufficient.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** for the trainspotters, the title is riffed from a key line in the Basement Jaxx song ‘Plug it in’.
Last week's post considered arguably the leading case in relation to lost trust deeds.
The case of Re Porlock Pty Ltd [2015] NSWSC 1243 provides further insight into the issues a court will consider where a trust deed has been lost.
In this case, the plaintiff was the trustee of the JBD Carr Trust No 2 which was established in 1957 and by the time of the court application had substantial assets. The trustee applied to court seeking advice pursuant to the powers under the relevant Trusts Act confirming how it held the property.
As part of the search for the deed, a letter was produced by the accountant of the trust which outlined how the income and capital of the trust was to be distributed. The trustee produced a supporting affidavit from the accountant indicating the letter was likely to be an accurate summary of the deed as he recalled quoting the trust deed itself when drafting the letter.
In making an order, the court concluded that the trustee would be justified acting in accordance with the letter as this was the ‘best evidence’ of the trust’s terms.
Importantly, the court confirmed that if the trust deed were to be found and a claim brought against the trustee by other parties who may be entitled under the deed, the trustee would not be personally liable for any breach of trust so long as they followed the advice of the court.
As usual, please contact me 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 Hoodoo Gurus song 'Dig it up'.
In the lead up to another 30 June, it is timely to consider one of the most important issues leading to potentially seeing trust distributions fail, that is the trustee having custody of the original trust deed.
Arguably the leading case in relation to when a court will allow a trustee to rely on secondary evidence where a trust deed has been lost is Maks v Maks (1986) 6 NSWLR 34.
In this case, both parties lived in a number of homes purchased by the defendant in his own name.
The plaintiff sought a declaration that the defendant in fact held a half share of the relevant property 'on trust'.
The plaintiff argued that a document had been signed by both parties which amounted to a declaration of trust. The alleged document was never produced at trial. On balance, the court considered a document did exist, however the judge was not prepared to make a finding as to the terms of the document.
It seems apparent from the decision, there was no argument put forward as to the nature of the terms of the missing document.
The court concluded that where secondary evidence is being relied upon to prove the existence of a trust, there must be clear and convincing evidence not only of the existence, but also the terms of the trust.
As usual, please contact me 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 World Party song 'Lost in infinity'.
The decision of Mantovani v Vanta Pty Ltd (No 2) related primarily to a lost trust deed, an issue explored in previous View posts.
Helpfully however, the decision also sets out a summary of the key duties owed by a trustee, noting that the office of trustee carries with it a number of strict obligations and duties, many of which are fiduciary in nature.
Fiduciary duties are generally seen as the most onerous of all legal duties and where they apply they require a person to act solely in another party's interests.
The case specifically confirms that the duties of a trustee include to:
become thoroughly acquainted with the terms of the trust and all documents relating to or affecting the trust property;
adhere rigidly to the terms of the trust and conform to and carry out the wishes of the settlor as expressed in the deed of trust; which is said to be ‘perhaps the most important duty’ of a trustee;
keep and render proper accounts and report to beneficiaries or to a court regarding the administration of the trust;
act fairly and impartially between beneficiaries;
administer the trust property in a way so as to avoid benefiting one beneficiary or set of beneficiaries at the expense of another;
make an application for judicial advice where the trustee requires advice or direction in relation to the management or administration of trust property or the interpretation of a trust instrument.
In relation to the last mentioned duty (ie to seek advice), it should be noted that a failure to seek advice has been held to be at the trustee’s 'own peril'. This is because any departure from the terms of the trust and any negligence in the performance of the duties of the trust will amount to a breach of trust.
Similarly, any acts in contravention of the duties imposed on the trustee by the trust or in excess of its powers will also be a breach of trust.
The ability of a court to review, and potentially unwind, a decision of a trustee, including for a breach of fiduciary duties, is in many respects predicated on the trust adviser's mantra profiled often in this journal, namely: 'read the deed'.
The issues in this regard can be particularly critical in relation to discretionary trusts where, at least in theory, there are few limitations placed on a trustee concerning most key aspects of the administration of the trust.
In a sentence, the rule the courts appear to apply is that a trustee's decision cannot be reviewed unless, on the material before the trustee, it is one that no reasonable trustee could have made.
What this rule means in any particular factual matrix can however be somewhat nuanced – reinforcing the value that advisers who adopt a holistic approach to estate planning can add in this space; pending ChatGPT taking over.
One of the key trustee duties of any form of trust is to know the terms of the trust deed and keep the original wet (not electronically!) signed trust instrument safe and secure. This duty is very difficult to discharge however if the trust deed is lost.
The case of Jowill Nominees Pty Ltd v Cooper [2021] SASC 76 ("Jowill") provides a recent insight into the issues a court will consider where a trust deed has been lost. Court application being the only pathway to achieve a solution that is binding on beneficiaries and third parties such as revenue authorities, as well as protecting the trustee where an original trust deed has been lost.
While Jowill involved a discretionary trust, many of the principles are applicable for self-managed superannuation funds (SMSFs).
Factual matrix
Broadly, the factual matrix involved a trust that was established in 1976 and for many years had as its substantive asset shares in Coopers Brewery Limited. The original trust deed was unable to be located and there was also no copy of the document.
There was however an advice letter from a lawyer in 2007, based on a review of the original trust deed that explained a number of key provisions including the range of beneficiaries. Other aspects were also able to be reverse engineered, such as the probable perpetuity period and the fact that the deed likely permitted capital distributions.
The capital distribution power was assumed to exist by the court on the basis of the lawyer's evidence that if it did not, this would have been flagged in the advice letter, particularly because the lawyer confirmed no trust deed read in 45 years of practice failed to contain such a provision.
Decision
The court confirmed that under the relevant state based Trustee Act it could vary the trust deed (effectively adopting a new deed here), so long as the following tests were met (all of which were, primarily due to the evidence of the lawyer that provided the 2007 advice letter):
there is good reason to make the proposed exercise of powers;
the proposed exercise of powers is in the interests of beneficiaries;
the proposed exercise of powers will not result in 1 class of beneficiaries being unfairly advantaged to the prejudice of another class (here it was critical that all beneficiaries were represented before the court);
the proposed exercise of powers accords as far as reasonably practicable with the spirit of the trust;
the proposed exercise of powers will not disturb the trust beyond what is necessary to give effect to the reasons for the revocation or variation; and
the application is not substantially motivated by a desire to avoid or reduce the incidence of tax.
The deed approved by the court was based on a precedent as at 1978 of the firm that had likely drafted the trust deed, adjusted to align with the advice from 2007.
While the court did consider a request to simply revoke the trust, it ultimately confirmed its preference to approve the, varied, adopted trust deed as it was the least disruptive approach. The court confirmed the trustee could choose to exercise its discretion to make a capital distribution of the assets of the trust (which was its intention) and subsequently vest the trust, relying on the terms of the court approved deed.
Vesting issues
If a trust deed cannot be found, commercially with discretionary trusts it can often be the case that the most responsible approach is for the trustee to wind up the trust. Indeed, there may be disgruntled beneficiaries or third parties that essentially force a trustee to adopt this course.
Any vesting of a trust and subsequent distribution of assets, with or without court approval, is likely to trigger a range of revenue consequences, particularly taxation and stamp duty.
Most of these can generally be ignored however in relation to SMSFs as a result of the leading case in relation to trust resettlements, namely FCT v Commercial Nominees of Australia Ltd (2001) 47 ATR 220 and subsequent Tax Office statements (for example, see Private Ruling Authorisation Number 14613, which confirmed that amendment of an SMSF deed, that was not lost, by deleting all the operative provisions and inserting the terms of an updated trust deed did not cause a CGT resettlement).
Adopting a new deed
In the context of SMSF trust deeds (and indeed other forms of fixed trusts with a narrow range of known beneficiaries, who can be proved via other evidence), a court application for adopting a new trust deed is generally seen as being unlikely to be necessary from a trust law perspective.
That is, the trustee and interested beneficiaries can simply adopt a new deed.
However the federal court decision in Kafataris v DCT [2008] FCA 1454 highlights that even for trusts with an ostensibly narrow range of potential ‘beneficiaries’ care must be taken.
In this case a husband and wife established separate SMSFs appointing themselves as sole members. They declared a property owned by them as property of their respective SMSFs.
In considering who the ‘beneficiaries’ of each SMSF were, it was held that upon construction of the SMSF deeds, the class of beneficiaries was broader than each single member. This was because the trust deed allowed the trustee to pay benefits to the member’s dependants and even relatives (if there were no dependants, as defined under the superannuation legislation) of the member.
As such, in this case, the potential class of beneficiaries included 21 different people.
Best practice therefore dictates that each person who can enforce the due administration of the trust should be a party to and sign a deed of variation that seeks to implement a replacement for a lost SMSF trust deed (see also Re Bowmil Nominees Pty Ltd [2004] NSWSC 161, which confirmed that where all potential beneficiaries agree to a variation, there is no need for the court approval).
Other approaches
Alternatively, a conservative approach (that may be appropriate if a court application is not commercially viable) can be to adopt a replacement deed and then establish a new SMSF and immediately the roll assets of the fund that had the lost deed into the new structure. The heritage SMSF would then be wound up.
Regardless of which approach is adopted, other than court application, if an SMSF trustee is adopting a new deed without any evidence as to the original terms, specific specialist advice should be obtained as to whether this will amount to a CGT resettlement. Fortunately, from a stamp duty perspective, most states have a concessional regime that any variation of an SMSF trust deed (even if it causes a duty resettlement) will be liable for only nominal stamp duty.
Conclusion
While it is possible to reconstitute the terms of a lost SMSF trust deed, the process is generally time consuming, commercially difficult and unnecessarily costly.
As with many similar areas, despite the potential triteness of the statement, when considering the implications of lost trust deeds, prevention is the best cure.
As usual, please contact me 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 U2 song 'New Year’s Day’.
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