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Discretionary Trusts

Do you provide stamp duty advice?

We do not provide stamp duty advice and it is best that you obtain your own advice before instructing us to do something on your behalf. We recommend contacting the various State revenue authorities to assist you with your enquiries.

What is a Settlor?

The Settlor is the person who "settles" a discretionary trust, by providing the settled sum to the Trustee (or Trustees).

The Settlor must also actually pay the settled sum. If they don't pay the settled sum the trust will never have existed, because for a trust to exist there must be trust property - in most cases the trust property will start out being the settled sum.

Who should I put as the Settlor?

Best practice is to have a close, though unrelated, family friend as the Settlor.

We do not accept relatives of the beneficiaries or trustees as Settlors. The Settlor has to be someone that will never benefit from the trust, and the trust deed specifically excludes the Settlor from benefiting. This is primarily due to the adverse tax consequences that can otherwise arise - refer S.102 of the ITAA 1936, in particular. Also, it avoids the possibility that the Trustee may, at some stage later on, accidentally breach the trust deed by making a distribution to the Settlor.

There have also been instances where the validity of the entire trust has been questioned because it was found that the settlor (e.g., an accountant) charged for providing the settled sum, meaning it was never properly gifted to the trust, and therefore there was no trust property to allow the trust to exist.

How much should the settled sum be?

We advise that the sum is preferably $10 or more, as it is seen to be a sufficient amount to start a trust.

Some court cases (a recent case we have seen is Cumins v FCT [2006] FCA 43) have not questioned a settled sum of $5. Nonetheless, a settled sum of at least $10 is advised.

What does the Appointor do?

Technically, the appointor (in our deed, and similar deeds) has the most control of the trust because they can appoint and remove the trustees who exercise the various trust powers.

Appointors will generally be assumed to be "joint appointors", unless we are otherwise instructed that one or more appointors are to be independent. Joint appointors have rights of survivorship, which take a kind of 'last man standing' approach. For example, if Husband and Wife are joint appointors and Husband dies, the Wife becomes sole appointor.

Who should be the Appointors of my trust?

In general, due to the control issues, the appointor/s should in most cases include at least one of the people setting up the trust, e.g., one of the primary beneficiaries.

Some trusts include an "independent" appointor (usually the accountant), in addition to two joint appointors, to help make independent appointment decisions, but who will be "wiped off" the trust once both normal appointors die. This ensures that the accountant (or other independent appointor) and their spouse/children/etc don't end up with sole control of the trust.

If there are persons other than the primary beneficiaries listed as appointors, please let us know if they are to be joint appointors (i.e., with rights of survivorship), or if one or more of them is an independent appointor. For example, two appointors may be from different families (e.g., two brothers) and might not want to be joint appointors with rights of survivorship.

Read this article for more information about the importance of choosing the right appointor.

Is a company prohibited from being the appointor of a discretionary trust?

No, that's fine. Unusual, but fine. An appointor arrangement available online is to have a company appointor and a nominated backup appointor (an individual) to step in if the company cannot act. In this situation the company appointor acts until it is wound up/deregistered/cannot act as appointor etc. and is then replaced by appointor two (commonly a director of the company).

A company can act as appointor without a nominated backup if you wish (so long as that company is not the trustee of the trust), however you will need to call for assistance when placing your order online.

What does your standard current trust deed state in relation to the issue of appointors passing away and who steps into their shoes?

What happens when an appointor passes away generally depends on the instructions of the person setting up the trust!!

However, in general:

  1. If there is only one appointor, unless their will says otherwise, the powers of appointment will pass to their legal personal representatives (LPRs);
  2. If there are two or more joint appointors, as each one dies, the powers of appointment will pass to the remaining joint appointors until there is only one left, and then the powers will pass to that person's LPRs;
  3. If any of the appointors are considered "independent" (eg, an accountant or solicitor), then that person will never get the sole power of appointment (i.e., once there is only one family member appointor and the independent left, the powers of appointment will pass to the family member's LPRs on their death).  However, we require specific instructions in this regard so that this can be specified in the schedule to the deed; and
  4. The appointors may choose not to be joint (in the context of survivorship), meaning that on their death, their own power of appointment will pass to their own LPRs, rather than to any surviving joint appointors. Where a husband and wife are to be joint appointors, the deed is set up as per 2. above.

    It should also be noted that subclause 18.3 of the deed allows for additional/replacement appointors to be appointed while the appointors are still living:

    "Subject to the restrictions (if any) specified in item 9 of the Schedule, an Appointor shall have the power, exercisable jointly with any other Appointor, from time to time by deed or will to appoint another person to act as the Appointor either jointly with the existing Appointor or to act as sole Appointor and to provide for the method of succeeding Appointors to be appointed and if such a person or persons accept the appointment they shall exercise the powers of the Appointor in accordance with the terms of the appointment notwithstanding what is specified in the Schedule about who shall be the initial Appointor of the Trust."

Also, under subclause 18.6, "If at any time or from time to time there is no Appointor remaining or otherwise appointed, the Trustee for the time being may assume the powers of the Appointor."

Finally, an appointor may be automatically removed if they become bankrupt or mentally ill, or if the appointor "is acting in the capacity of, or on behalf of, a trustee in bankruptcy, liquidator or administrator, or the Family Court Registrar", but they can resume their position if the condition that caused the Appointor to be removed ends, is reversed or otherwise ceases.

We want the appointors to act unanimously - does your deed cover this?

Yes - our deed already covers this. The Appointors are required to act jointly if there is more than one. A dispute resolution mechanism is provided in case they are deadlocked and cannot reach agreement.

If you want additional restrictions on the Appointors, we can add them to the Schedule.

If an appointor in a discretionary trust gets sued, is the trust in danger?

The reason this might be dangerous is if the powers of the appointor are considered "property". If they are, then a trustee in bankruptcy, for example, could then possibly acquire, and then use, those powers to appoint a trustee that would make distributions to creditors, etc. Unfortunately, whether or not a trustee in bankruptcy could do this is still unclear.

However, even if they could do this (and it is unsure whether they could), an appointor is still expected to exercise their powers in accordance with their fiduciary duties (i.e., in the interests of all the beneficiaries).

At the end of the day, this is a technical legal issue that would require specific legal advice. Nonetheless, under our current deed, "the office of an Appointor will be vacated if that Appointor:

(a) becomes bankrupt or otherwise seeks relief under the laws pertaining to bankruptcy; or

(b) that Appointor is acting in the capacity of, or on behalf of, a trustee in bankruptcy, liquidator or administrator, or the Family Court Registrar"

This is designed to make the trust safer in case an appointor does get sued.

Also, having an independent appointor (such as a trusted family accountant or solicitor) can make the trust safer, too, since the deed requires that the decisions regarding appointment be made jointly (i.e., unanimously).

Is the trustee excluded from being a beneficiary?

There are no limitations in our deed regarding whether the trustee can be a beneficiary.

In fact, the deed specifically states that the trustee can benefit from the trust and exercise powers in its own favour. However, the settlor is specifically excluded.

Why would the trustee be excluded from being a beneficiary?

Some people are of the view that allowing the trustee to be a beneficiary may invalidate the trust - or at least that any distributions by the trustee to itself may be difficult to justify in light of their fiduciary duties.

Of course, we are reliant on the courts in establishing what trusts can and can't do. In a recent case in the Victorian Supreme Court (Ailseen Pty Ltd v One Hawker Holdings Pty Ltd & Anor [2006] VSC 135), not only was the trustee also a beneficiary of the trust, but the settlor didn't provide the settled sum and his signature was forged and the trust was still valid!

That said, we do not advise this course of action.

So it's OK for a husband and wife, who are the primary beneficiaries of the trust, to also be the trustees?

Where there is a broad class of beneficiaries, as there is with a discretionary trust, there should be no problem with the individual trustees also being the primary beneficiaries. For a trust to exist, there needs to be a separation of legal and beneficial interests between the trustees and beneficiaries, and if two trustees hold the trust property on trust for a broad range of beneficiaries (which may include the trustees themselves), this should satisfy the requirement of separating legal and beneficial ownership.

Note that this result should not change whether there are two individual trustees, a sole individual trustee, or, indeed, a company where the directors and shareholders are also primary beneficiaries.

Specifying the primary beneficiaries in the deed is simply a means of establishing who is included in the entire class of beneficiaries (as the General Beneficiaries are determined in part by reference to the Primary Beneficiaries), although the primary beneficiaries can also be default beneficiaries in certain circumstances.

It is important to remember, therefore, that, in a discretionary trust, the potential beneficiaries (also known as "objects" of the trust), may include hundreds of individuals, companies, and trusts associated with the primary beneficiaries and each other (as well as charities), and it is for these potential beneficiaries that the trustees hold the property on trust (i.e., not just for the primary beneficiaries alone).

There is an argument that allowing a trustee to be a beneficiary may invalidate a trust, but that argument is not supported by the case law as it currently stands (and would probably invalidate a lot of trusts in Australia!) However, we have heard that this may be a problem overseas. To be extra careful, therefore, some people prefer to have a totally independent trustee "just in case".

Note that some say that the same argument could apply where a corporate trustee's directors and shareholders are also primary beneficiaries, i.e., this could invalidate the trust, although the corporate trustee in such a case, being a separate legal entity, is probably one step removed, and there are other benefits to having a corporate trustee (such as personal asset protection), although the costs of having a corporate trustee are higher. Also, a trustee who is also a beneficiary would need to be careful to ensure that he or she does not breach any of their fiduciary duties in relation to the trust and the beneficiaries. For example, the trustee has a duty to act honestly and in good faith, and should also consider all of the potential beneficiaries (or "objects") of the trust before making a distribution in a particular year, irrespective of whether he or she is also a beneficiary. In addition (this is taken from the NTAA's recent "Trusts" seminar notes):

"Unless the trust deed specifically allows it, (the trustee) cannot exercise his powers in his own favour. For example, he could not borrow money in his own capacity from the trust interest free and without security unless the trust specifically allowed it. Similarly, if (the trustee) was also a beneficiary he must take care when exercising his discretion to distribute income to himself. An improper exercise of that discretion to advance his own interests will constitute a breach of trust."

And this means that it is possible to have the sole director of the corporate trustee of a discretionary trust to also be a beneficiary of the trust?

We see no problem with having the sole director of the corporate trustee of a discretionary trust being able to benefit from the trust.

Since the corporate trustee is a separate legal person, and the class of beneficiaries of a discretionary trust is very broad, there is no issue of the legal and beneficial interests in the trust property merging - i.e., the legal owner is the company, and the beneficial owners are effectively all of the discretionary objects in the deed. We have never heard that "control" of a trustee by a single beneficiary (in a class of many beneficiaries) could invalidate a trust - in fact, many discretionary trusts would be controlled by a single individual, whether as a director of the corporate trustee or as an individual trustee. It is highly unlikely that it could be said that a trust was never formed simply because the director of the corporate trustee makes a decision in a particular year, by resolution of the trustee, to make a distribution to himself as a discretionary object of the trust.

I want the trustee to be based in the USA (although everything else is in Australia). Is this allowed or does it have to be an Australian trustee?

It's "allowed", but it means that the trust will be a "non-resident trust" for tax purposes (and this can lead to bad, or at least inconvenient, tax consequences).

Generally when we tell people this, they then change the trustee.

Refer to the following page on the Tax Office's website for more information:

Residency requirements for trusts:
https://www.ato.gov.au/business/international-tax-for-business/working-out-your-residency/#Trusts

Regarding the witnessing of signatures, can one of the Primary Beneficiaries witness the signature of the Trustee?

The only restrictions on who can be a witness to sign a trust deed are that the witness is not under a legal disability - e.g., being under 18 years of age would prevent the person being a witness.

However, each State and Territory has different rules about when deeds will be validly executed. Some of these include the requirement that the deed be witnessed by an independent person. Therefore, it may be worthwhile having a person unrelated to the trust arrangement witness the signature.

The trust I'm setting up has a different trustee to the appointor and beneficiary. The trustee lives in Australia but the appointor/beneficiary lives in Italy. Is this ok?

Yes. The reason for this is often because the person with control over the trust is overseas (e.g., Italy), but they want the trust to be resident in Australia, meaning they need an Australian trustee.

The more important thing is that a beneficiary is represented as an appointor (though even this may not be crucial), because the appointor(s) can remove the trustee and appoint a new one if they like. This effectively means the appointor has overall control of the trust at the end of the day.

Are future spouses, children, trusts, etc. all included as beneficiaries of the discretionary trust?

Yes. The definition of "spouse" in the deed includes any spouse "from time to time", and the "further issue" of any of the relevant beneficiaries are also included as beneficiaries. In addition, most companies in which any relevant beneficiaries hold shares, and trusts in which any relevant beneficiaries have an interest or potential entitlement, whether or not the trust existed at the time the trust was set up, are also included as beneficiaries.

I want to exclude my client's ex-wife or ex-husband from being a beneficiary of the trust. Is this possible?

It is possible, and we can include this in the deed if you like (for an additional fee), although you had better hope you don't get back together!

It's also important to note that, although a person may be included as a "beneficiary" of a discretionary trust, they cannot actually benefit from the trust unless the trustee actively exercises its discretion to make a distribution to that beneficiary. Until such a point, all "beneficiaries" are more appropriately called "potential beneficiaries", or mere "objects", of the trust.

However, since it can be difficult to add beneficiaries to a trust after it has been set up, it is generally better to have the class of potential beneficiaries as broad as possible. Therefore, it shouldn't be a problem if an ex-spouse is included in the class of general beneficiaries unless there is a chance that he or she could become a trustee or appointor of the trust.

Does the discretionary trustee enable you to change the allocation of the income /capital earnings as time or the situation changes?

The trustee of a discretionary trust generally has complete discretion each income year when determining which of the objects of the trust (commonly called the "beneficiaries") will benefit from the income of the trust. The Beneficiaries clause of our trust deed is very broad, and includes most if not all members of a family, including great, great, great, great grandchildren (and even further) as well as companies and trusts the beneficiaries are involved with and various charities, to mention a few. Therefore, in one year, the trustee could resolve that each of the children under 18 receive $1,666, Dad receive $20,000, and Mum the remainder. The following year, Dad could receive $50,000, an uncle $10,000, and a related company receive the remainder. The next year, all Dad's living relatives could receive, say, 5% of the trust's income. Provided the trustee meets its duties under the trust arrangement, the distributions are entirely up to him/her/them/it.

Please note that distributions are generally relevant for tax purposes (i.e., they determine who pays tax on the income), and that they do not necessarily depend on cash moving between the relevant parties.

The trustee also generally has equal discretion regarding distributions of capital, whether during the life of the trust or when the trust eventually vests (i.e., when it effectively "winds up" and comes to an end).

Please note that trusts and trust law can be quite complex, and there are many more issues involved than those set out above. In addition, how the trust can be run can very much depend upon the terms of the individual trust deed. Therefore, we recommend that you obtain professional independent advice before ordering and operating a discretionary trust.

Does the trust allow distributions to be paid to a child, over whom the primary beneficiaries of the trust have guardianship?

Yes.

Does the trust allow distributions to be allocated to a child, but actually paid to the parents, not directly to the child?

Yes. The deed specifically provides a number of ways that the trustee can apply distributions on behalf of a beneficiary, including by "paying the income or capital to a parent or guardian of the Beneficiary or any other person where the income or capital will be applied for the benefit of the Beneficiary if that Beneficiary is a minor or is otherwise under a legal disability".

What is the Governing State?

The trust is subject to the laws of the Governing State (or Territory). This helps locate the trust in a specific jurisdiction, if the trust or any parties with an interest in the trust ever needs to seek the assistance of a court to enforce their rights.

Also, the Governing State is generally the State or Territory that will have the right to stamp and impose stamp duty on the settlement of the trust deed.

We do not advise on stamp duty, but most State and Territory stamp duty legislation impose duty on a trust deed when it is first executed in that State/Territory.

We want the Governing State of the trust to be Queensland, even though none of the parties to the deed live there. This is not just because there is no stamp duty on a deed settling a trust in Queensland, but the parties are hoping to acquire land in Queensland at some later stage. Is this possible?

For a trust to be subject to Queensland law (and to be exempt from stamp duty according to Queensland law) the trust deed effectively needs to be executed (signed) in Queensland. It doesn't matter that the trustee will later acquire property in Queensland - what is important is the situation at the time the trust is set up.

For example, if the parties to a trust were in either WA or NSW, it would be appropriate to look at the stamp duty laws of both of these states.

Therefore, if the first person signing the trust deed does so in NSW, the deed will be liable to stamp duty in NSW. If the the first person signing the trust deed does so in WA, the deed will be liable to stamp duty in WA. Otherwise, if it is executed in Queensland, it will be subject to Queensland law, and exempt from stamp duty under Queensland law. Refer S.58(1) of the Duties Act 1997 (NSW), and S.16 and S.17A of the WA Stamp Act 1921.

Can I change the governing state for the trust later on?

Yes, the trustee would be able to change the governing state later (along with other terms of the trust), but this would need to be done by means of a Deed of Variation, varying the trust deed. You would need to get advice at that time, to ensure that such a change did not resettle the trust.

Does the trust have a vesting date, as I thought the legislation has recently been changed to allow trusts to go on indefinitely?

Yes - the trust effectively has a maximum life of 80 years. This is because most States and Territories require trusts to vest (or wind up) after a maximum of 80 years. This is called the rule against perpetuities, and basically exists so that a person cannot tie up assets forever in a trust.

The rule against perpetuities was abrogated in South Australia a number of years ago (and even in that State any beneficiary can apply to have the trust wound up after 80 years), but every other State has retained the rule.

Therefore, our deed does require the trust to vest within or at the end of 80 years (the trustee has discretion to vest it earlier than 80 years).

Is there a clause in the trust that prevents the trustee from using the trust's assets to pay for the trustee's debts?

The trustee is not prevented from using trust assets for paying debts incurred as trustee - in fact, the exact opposite is provided for. That is, the trustee is explicitly authorised to use the trust assets to pay the debts of the trust (to be honest, I'm not sure how a trustee could adequately perform its duties if it was prevented from using trust assets in such a way). Of course, the trustee cannot use the trust assets to pay personal debts - to do so would breach the trustee's fiduciary obligations.

Is there a clause in the trust that would prevent us claiming an exemption from stamp duty when buying the family farm?

We don't provide stamp duty advice, and unfortunately we are unable to alter our deeds to take into account the various stamp duty regimes in each of the States/Territories. However, the following is an example of the information available regarding the family farm exemption in Victoria (from the State Revenue Office's website), regarding which trusts will qualify for an exemption. Looking at this information, it would appear that our trust deed would not meet these requirements, and a deed may need to be specifically drawn up by a solicitor:

What type of trusts qualify?

The transferee may be a trustee of a fixed trust which limits the beneficiaries to relatives of the transferor or charitable institutions. Alternatively, the transferee may be a trustee of a discretionary trust which only allows capital distributions of the primary production land (including any part of the primary production land) to be made to a relative of the transferor or a charitable institution.

The trust deed cannot contain a variation clause that would permit the distribution of the family farm (or any part of it) to parties other than relatives or charitable institutions."

We would like to order a Trust Deed and have it effective from January 2006. Is the wording on the current deeds you supply any different from the deeds you supplied in January 2006?

The wording does periodically change, but that does not matter. You must be very careful that by taking this course of action you are not inadvertently backdating the trust. It is, of course, illegal to backdate such documents, and backdating is not effective in any case.

This is because a trust comes into existence when there is (a) a trustee, (b) beneficiaries, and (c) trust property, whether or not there was a signed trust deed as at that date. Simply backdating a document does not satisfy these requirements if it cannot be proven that they were in existence as at the correct date.

We do not date deeds (the clients fill in the date on the date of execution), but we also only provide our most current deeds - i.e., we do not provide our earlier deeds.

If you want anything other than our most current deed, you should seek legal advice from a solicitor who can tailor a deed to your specific circumstances, taking into account the above considerations.

Why don't you offer restricted discretionary trusts any more?

We stopped providing restricted discretionary trusts from the 1st October 2004.

This product was designed to get around some of the problems with discretionary trusts being able to access the small business CGT concessions (due to an anomaly in the tax legislation which meant they were not ever able to satisfy the maximum net asset value test). Basically, it restricted the distributions that could be made to any one beneficiary of the trust to less than 40% of the income and capital of the trust (so that the assets of every single potential beneficiary were not considered assets of the trust for the purposes of the maximum net asset value test).

However, an amendment was made in 2004 to the control test in Division 152 of the ITAA 1997 (refer Tax Laws Amendment (2004 Measures No.1) Act 2004), removing this anomaly and making it easier for discretionary trusts to satisfy the small business CGT concession requirements without needing to have this restriction in the deed (the control test for discretionary trusts now generally looks at actual distributions, rather than potential distributions). This effectively eliminated the need to have a restricted discretionary trust.

I've heard that Hybrid Trusts can provide a lot of tax benefits. Do you provide them?

These types of trusts involve both fixed elements like a unit trust (and may even issue units), but also give the trustee an element of discretion in relation to the distribution of income and/or capital.

Although these types of trusts have their uses, they are often quite specific to the needs of the relevant individuals setting them up, and we do not provide them.

Also, we have found that the "tax benefits" of hybrid trusts are difficult if not impossible to achieve. Refer to our article on this topic, contrasting Hybrid Trusts with a Partnership of Discretionary Trusts here.

(We can refer you to a law firm who specialises in complex trust arrangements if you require.) 

 

Can you assist us with the winding up (vesting) of a Trust?

We can prepare a deed of vesting and supporting documents to wind up a trust. These documents will be prepared by our in house legal team in accordance with the terms of the deed, so we ask that you upload an executed copy of the original deed to the online order form.

If the trustee is a company and it is also going to be wound up, this should not happen until after the trust has been vested, as the trustee will be a party to the Deed of Vesting.

You will need to ensure that the trust has no income or assets as at the date of bringing forward the vesting date and that there are no remaining obligations to the beneficiaries.

You can order a deed of vesting online: Vest a Unit Trust or Vest a Discretionary Trust

What if I need to change something in my trust deed?

If we have recently set the trust up for you, and you have discovered that you want something changed in the deed and it has not yet been executed, we can generally make the change and update the documents for you. This is because the trust has not yet come into existence, and so we can just update the relevant parts (or the whole deed) and resend it.

However, once the trust deed is executed, the trust exists, and so any change will need to be done by our lawyers as a separate deed of amendment or variation, specific to your circumstances (generally for $350). Please contact us if this is the case or complete one of the following forms:

I completed the trust order form incorrectly, and since receiving the trust documents I have noticed that the spelling of one of the trustees'/beneficiaries'/appointors' names is incorrect. What can I do?

The incorrect spelling of a party's name on the trust documentation will not necessarily make the trust arrangement invalid, provided the parties can still be identified. However, we understand that some clients may not like the look of their names being spelled incorrectly.

Theoretically, the parties to the deed can write the relevant corrections directly on to the deed, and sign or initial to indicate that they all agree to these changes. However, some institutions (e.g. banks) may have an issue with this.

Alternatively, we can rectify the spelling and update the deeds for you, if you provide us with instructions with the correct details (on the understanding that, by re-printing the deeds, the printed version of the deed represents the trust deed as the parties understood it to be).

However, if the trust has already commenced (i.e., the deeds are executed and stamped (if appropriate), and the trust has started interacting with the outside world), then we would need to prepare a deed of variation to the existing deed ($350) to confirm or rectify the spelling. Please contact us if this is the a case.

Can I prepare my own deed of amendment/other legal documents?

In general, only lawyers are able to draw up legal documents (and do other "legal" work) for a fee, under the Legal Practice Acts of the various States and Territories. Therefore, only a lawyer can be paid to prepare such documents.

However, a person is entitled to draw up their own documents for their own use, but it is important to ensure that, when non-lawyers draft legal documents, the documents are still legally effective.

The fact that a legal document is not drafted by a lawyer does not make it "illegal" as such, although a non-lawyer who does so, for a fee, can be subject to prosecution (for example, S.21 of the Legal Practitioners Act 1981 (SA) states that a person who does something that only a lawyer should do, for a fee, can be fined $10,000).

I set up a discretionary trust through another service provider, and now wish to change the trustee. Are you able to perform this service? If so, how much would this cost? Also, will this involve reissuing a new deed?

Changing the trustee normally requires a deed of variation. To do this, we need to see the existing trust deed, establish how a variation of the deed can be accomplished, and then, usually, prepare the deed of variation, often to be signed by the trustee (sometimes the appointor (or equivalent) also needs to consent in writing - we provide this, too). The deed of variation needs to be prepared on the basis of the client's deed - we cannot really use a "pro-forma" deed.

We provide our deed of variation service for $350. We do not issue a new deed - you will basically attach the deed of variation that we issue to your existing trust deed.

Click here to order a change of trustee for a trust.

I have heard that ASIC treated the assets of a discretionary trust as the personal property of a beneficiary recently. Is this true?

In essence, yes, although the case was specific to its own facts and the specific parts of the Corporations Act 2001 that ASIC was relying on. However, the case has created a lot of concern.

The case, Richstar, was a Federal Court decision in Western Australia (regarding the ongoing saga of the Westpoint collapse). The court held that where:
  • a defendant in the action was a beneficiary of a discretionary trust; and
  • that beneficiary was the effective controller of the trust;
  • then it was arguable that ASIC was able to appoint receivers over the assets of that discretionary trust

This is a substantial change from the accepted application of trust and property law. In fact, the judge acknowledged that, in the ordinary case, a beneficiary does not have an interest, not even a contingent interest, in the assets of the trust. However, he went on to hold that:

" where a discretionary trust is controlled by a trustee who is in truth the alter ego of a beneficiary, then at the very least a contingent interest may be identified because 'it is as good as certain' that the beneficiary will receive the benefits of distributions either of income or capital or both."

Examples where the beneficiary was an 'effective controller' included where:
  • the beneficiary was the director and secretary of the trustee company, and the original appointor (with his wife being the current appointor);
  • the beneficiary was current trustee and the current appointor was his wife; and
  • the beneficiary was the appointor.
Although this is a concerning development, it should be remembered that this is a decision of a single judge in an interlocutory matter (the decision freezes the assets until the substantive issues, such as whether the beneficiaries truly own the assets in question, have been determined). Also, the decision relates to the broad definition of 'property' in the Corporations Act 2001, which is very different from, for example, the definition of divisible 'property' in the Bankruptcy Act 1966.

Nonetheless, it would be worthwhile to seriously consider which of the beneficiaries, if any, should also be trustees and/or appointors of the trust.

Can you stamp my client's trust deeds?

As a registered Duties Online organisation, we can process the duty in Victorian and New South Wales for deeds that we have established. (Please note that we need the executed deeds in hard copy to process the duty and unfortunately cannot accept a scanned copy.)

Read more about our optional stamping service for Discretionary, Unit and Child Mainentance Trust establishments.

Can you amend my client's trust deed?

We can prepare a trust deed amendment to make the following changes to an existing trust:

 

Our legal team will review your existing deed and prepare the amendment as a supplementary deed to be kept with the original trust deed. The deed and supporting documents will be prepared in accordance with the rules as set out in the original trust deed.

Where more than one of these changes is to be made, please note the price is $350 per change and separate deeds of amendment will be prepared.

In some rare cases an initial deed of amendment may be required to add the power to make the amendment. In these cases a further $350 applies to make that amendment to the deed to enable the change you want to make.

Please note: we are unable to change/remove beneficiaries of an existing trust due to the risk of resettling the trust. When a "resettlement" occurs, the old trust is considered to come to an end and a new one begins, giving rise to CGT and stamp duty issues. We would recommend seeking legal advice in this situation.

Can foreign persons be excluded from a new discretionary trust deed to avoid surcharges on either or both stamp duty and land tax where the residential property/land is acquired/held by a ‘foreign person’?

Yes, we do offer trust deeds that specifically exclude ‘foreigners’ (as defined in the respective States) from being General Beneficiaries of our discretionary trusts.

You can indicate this on your online trust form by answering the relevant questions regarding the intention to purchase property and exclude foreign persons.

What is the settled sum and what should the trustees do with it?

A discretionary trust is created when a person known as the “settlor” gives the trustee money or property for the benefit of the beneficiaries. This “settled sum” is the original trust fund.

It is often a good idea for the trustee to open a bank account to deposit the settled sum shortly after the deed has been executed (if the trustee is a company set up by InterDocs, the included directors’ resolution assumes this will be done) – this can provide further evidence regarding the date the trust was settled. Some trustees prefer to staple the settled sum to the deed, so as to ensure it is not eroded by bank fees, but this can also be dangerous if the original deed is lost (meaning the settled sum is completely lost). However, if a corporate trustee would prefer to take this alternative option, they should amend the directors’ resolution accordingly.

I'm concerned about a trust paying the land tax surcharge when purchasing a property. Does InterDocs offer a discretionary trust deed that will exclude foreign beneficiaries?

Yes, we have specific deeds for the existing affected States for concerned members, and as legislation is passed for other States we will develop further products.

To establish a trust with the deed excluding foreign beneficiaries, simply indicate this option on the online form.

Read on here for more information.

 

Can InterDocs prepare documents to exclude foreign beneficiaries of an existing trust (in relation to the land tax surcharge for foreign purchases of property)?

Yes, if the existing trust was set up with InterDocs we can prepare a deed of variation to exclude foreign beneficiaries from the class of General Beneficiaries.

These documents are to address new laws in various States which impose a stamp duty surcharge and, in some cases a land tax surcharge, on certain foreign purchasers of residential land in that State. These laws may extend to discretionary trusts. Specifically if any of the beneficiaries under the trust are ‘foreign’ (as defined by the relevant State Act), the trust could be deemed to be a ‘foreign trust’ (and, therefore, possibly subject to stamp duty and/or land tax surcharges).

We do this on the basis that your Trust has a standard InterDocs Trust Deed. In particular, clause 10.1 of our standard deed allows the Trustee, with the consent of the Appointor, to exclude a person from the class of General Beneficiaries under the Trust, and the documents rely on the exercise of these powers (note that it is not possible to exclude a Primary Beneficiary from being a beneficiary under this power, so if a Primary Beneficiary of the trust is a ‘foreigner’, the trust may still be considered a ‘foreign trust’).

If your trust deed is not a standard InterDocs Trust Deed, this variation will not be suitable for your Trust and we recommend you seek independent legal advice for the preparation of resolutions specific to your trust deed.

If you would like us to prepare the documents, please email us at info@docscentre.com.au.

Can InterDocs remove a beneficiary from an existing trust?

We are unable to remove beneficiaries of an existing trust due to the risk of resettling the trust or triggering duty issues.

When a "resettlement" occurs, the old trust is considered to come to an end and a new one begins. This generally happens where the trustee undertakes to do something (a new "trust") not considered when the trust was first established by the original settlor - therefore, the trust has been "resettled". 

Effectively, the old trust disposes of all of its assets to the new trust, giving rise to CGT and stamp duty issues.

Stamp duty issues can also arise in some states and territories where particular beneficiaries are removed, or new beneficiaries are added – even if this is permitted by the trust deed.

We would recommend seeking independent legal advice in this situation. (We can refer you to a law firm who specialises in complex trust arrangements if you require.)

Can you stamp trust deeds that are late and outside of the prescribed time frame?

We are able to stamp most deeds that are a little late, however if they are extremely late then we may not be able to assess online.

There may be interest to pay based on the time between signing the trust deeds and them being assessed for duty.

It's up the the relevant state revenue office to determine whether there will be penalties or interest to be paid for late assessments, and we are unable to calculate this until we attempt to process the duty online. As a guide, the VIC and NSW SRO will often waive penalty interest under $20 for deeds that are a few months late, but not if they are years late.

To avoid late interest fees from the SRO trust deeds should be stamped in Victoria within 30 days of signing and within 3 months of signing in New South Wales.

See more information about our trust stamping service.

Should different trusts have different trustees or can one trustee act for more than one trust?

It is generally preferable to have separate trustees for the following reasons:

  • it avoids the need to prove which assets belong to which trust. If two trusts have the same trustee and one gets into financial difficulty, it could be extremely costly for the trustee to prove which assets are beneficially owned under which trust; and
  • there is a risk that a creditor could get access to the assets of all trusts for which the trustee acts, i.e., creditors of one trust may access assets of the others.

Does InterDocs offer the option to exclude foreign beneficiaries for the purposes of the new foreign duty surcharge that applies in Tasmania from 1 July 2018?

Yes, we have deeds available that will exclude foreign persons that might otherwise be beneficiaries for this purpose. (There is a question relating to this on the online trust form so please complete this when ordering the trust establishment online.)

Note that, in relation to the ‘regular’ discretionary trust deed, all such persons are excluded from being beneficiaries at all, despite the fact that the Tasmanian legislation only looks at a foreign person’s ability to benefit from the “capital of the trust estate”.

However, because both the pedigree and the child maintenance trust separately define “capital beneficiaries”, for these Tasmanian deeds, we have only excluded foreign persons from being capital beneficiaries (and note further that, in relation to the child maintenance deed, this is probably unnecessary, since the children (and their LPRs) are the only capital beneficiaries under those deeds, anyway).

I note that your discretionary trust deed lists the primary beneficiaries as the the people named in the form and their children and remoter issue. What does children and remoter issue mean?

This means the persons listed, their children and their children's children - and so on.

If you would like us to remove "and their children and remoter issue" from the primary beneficiaries section of the schedule, please provide special instructions to this effect when ordering.

When applying for an ABN for a discretionary trust, what type of organisation should I set the applicant as?

A discretionary trust can be categorised by its income earning activities:

Trading - where the main source of income is from trading activites

Investment - where the main source of income is from investment activities and includes charitable trusts (established solely for charitable purposes)

Services management - where the main source of income is from service and/or management activities

What does the appointor of a discretionary trust do?

The appointors (or appointor) of a trust have the real power and control of the assets of a trust, since the appointors have the power to appoint and remove trustees. In most cases, the original appointors include the one or more of the parties for whose benefit the trust is established.

We have a Discretionary Trust Deed prepared by you. The Court has ordered that the wife be taken off the Family Trust as a beneficiary and an appointor. We have found the form on the website to remove appointors. Please advise how we remove the wife as a beneficiary?

While we are able to assist in removing an appointor and other changes to trusts via a trust deed amendment, we are unfortunately unable to remove beneficiaries of an existing trust due to the risk of resettling the trust.

When a "resettlement" occurs, the old trust is considered to come to an end and a new one begins. This generally happens where the trustee undertakes to do something (a new "trust") not considered when the trust was first established by the original settlor - therefore, the trust has been "resettled". 

Effectively, the old trust disposes of all of its assets to the new trust, giving rise to CGT and stamp duty issues.

We would recommend seeking independent legal advice in this situation.

I have a client with an extremely old Trust Deed. Is it possible to have it modernised or to adopt a new deed?

Unfortunately, we’re unable to replace or modernise trust deeds of existing trusts (except for superannuation funds), as this is highly likely to resettle the trust.

It is commonly accepted that small changes to a trust deed, such as the addition of a trust power, will not resettle the trust, but that a change to the beneficiaries, and especially the adoption of an entirely new deed, can resettle the trust.

When a "resettlement" occurs, the old trust is considered to come to an end and a new one begins. This generally happens where the trustee undertakes to do something (a new "trust") not considered when the trust was first established by the original settlor - therefore, the trust has been "resettled". Effectively, the old trust disposes of all of its assets to the new trust, giving rise to CGT and stamp duty issues.

If it’s a minor change you’re after (e.g. a particular clause that you are concerned about or a power you would like to include in the deed), then we may be able to assist. If this is the case, please send an executed copy of the deed and an explanation of the power you’d like to include/vary for our legal team to consider.

If it’s a full deed replacement you’re after, we would recommend seeking external legal advice.

Under InterDocs's discretionary trust deed, we set up Jane Bloggs as a primary beneficiary. Jane's sister Sarah has passed away and we wonder whether her partner, Scott (whom Sarah was in a continuous relationship with for 20 years, but never married), is eligible to receive distributions under the General Beneficiary clause in your deed?

Under our deed, Scott would be included as a general beneficiary, on the basis that he was the de facto spouse of Sarah, who was the sister of the primary beneficiary. Also, Scott continues to be a general beneficiary now, notwithstanding that Sarah is now deceased.

Therefore, the trustee of this trust is able to pay distributions to Scott as a beneficiary.

Our trust deed provides that general beneficiaries include (among others) “any………sister………of any of the Primary Beneficiaries and their Spouses………”.  The words “and their Spouses” would include a spouse (as defined) of a sister of the primary beneficiary.

Under our trust deed, "Spouse", means any person with whom the person is or was living or cohabiting (or with whom the person was living or cohabiting immediately prior to the person’s death) in a bona fide domestic relationship. 

Scott would be considered a spouse of Sarah under the trust deed, and he remains so notwithstanding that Sarah has died.

Can you stamp trust deeds?

Absolutely! We are a registered lodger in Victoria and NSW for trust deeds that we have established.

When you set up a Victorian or NSW trust with us, you have the option to order our Stamping Service for $33 (plus the duty for the relevant state). We create the deeds and send to you for execution and stamp/assess them once they’re returned to our office. We have more information about this on the stamping page of our website.

Our trust establishments are available when logging in. Our services are available to accounting and financial professionals, so if you are neither of these, we would recommend contacting a financial services professional to advise you (they can organise all this for you).

Otherwise, if you already have your deeds and only need them stamped, the relevant revenue office in your state should be able to provide you with a list of registered lodgers who may be able to assist you.

What trusts documents need to be prepared when the corporate trustee of a trust changes its name? And could changing the name of the trustee company cause a resettlement of the trust?

We believe that it should be fine to change the name of the corporate trustee, without any adverse consequences for the trust.

As the company itself will be remaining as trustee of the trust and only its name will be changing, we don’t think it should be necessary to prepare and documents for this change. When the company receives its certificate of name change from ASIC, a copy of the certificate should be kept with the trust deed to show that the trustee’s name has changed.

Note that some banks may insist on a deed on confirmation or similar to confirm that although the company name has changed, the trustee of the trust remains the same. We think this shouldn‘t be necessary, but can assist in this regard if so requested (our fee to prepare a deed of confirmation would be $350).

In a deed of variation or deed of vesting for a discretionary trust, should the settlor's address be their current address, or their address as appears in the deed of establishment?

It is generally better to refer to the settlor’s address as it was in the deed of establishment, rather than the settlor’s current address (and this is the way we will prepare the documents).

We say this because the settlor’s only role is to sign the trust deed establishing the trust and pay the initial settlement sum.  The settlor should have no other involvement with the trust, and if the settlor’s current address is referred to that may suggest that this is not the case.

Note that the situation is different in relation to the trustees, appointors, etc. of a trust – their current addresses should be referred to in any subsequent deeds or documents regarding the trust.

My client wants to set up a discretionary trust that will exclude foreign beneficiaries and then, down the track, vary the deed to include foreign beneficiaries in the future. Can this be done?

If a discretionary trust is established using our “foreign exclusion” trust deed, then it should not subsequently be varied so as to include foreign beneficiaries.

We say this because a subsequent amendment to include foreign beneficiaries may constitute a resettlement, which could have serious capital gains tax and stamp duty implications. 

We understand that the State Revenue Office (SRO) may grant an exemption from the stamp duty surcharge and land tax surcharge to a trust using our foreign exclusion trust deed on the basis that the trust will never have any foreign beneficiaries.  Therefore, if the trust deed was subsequently amended so as to include foreign beneficiaries, the SRO may then seek to impose penalties (and there is also the risk of resettlement, as stated above).

Is it possible to have one appointor at the time of setting up a discretionary trust, and add another appointor in the future, without resettling the trust?

Yes, this is possible. You can set up the trust with one appointor now and then when needed you can have a deed of variation prepared (which we can do for you) to have a new appointor added. Based on our current deed, this will not resettle the trust.

Our legal team will prepare a deed of variation to change the current appointor arrangement in accordance with the provisions of the trust deed. This may be to add an additional appointor, remove an appointor or to change the appointor arrangement based on the rights of survivorship. For more information and to order, click here.

What are some of the tax consequences for non-resident trusts?

If a trust is a non-resident trust, there are various tax rules (including the “transferor trust” regime, and the “foreign investment fund” regime) which may attribute some of the income of the trust to some of the Australian beneficiaries of the trust.

The purpose of these rules is to ensure that foreign sourced income of Australian residents is taxed at Australian rates of tax, and to prevent offshore accumulation of income in low or no tax jurisdictions.

I'm setting up a discretionary trust in which the trustee will be based overseas (although everything else is in Australia). Is this allowed or does it have to be an Australian trustee?

It's "allowed", but it means that the trust will be a "non-resident trust" for tax purposes (and this can lead to bad, or at least inconvenient, tax consequences).

Generally when we tell people this, they then change the trustee.

Refer to the following page on the Tax Office's website for more information:

Residency requirements for trusts:
https://www.ato.gov.au/business/international-tax-for-business/working-out-your-residency/#Trusts

I'm setting up a discretionary trust which has a different trustee to the appointor and beneficiary. The trustee lives in Australia but the appointor/beneficiary lives overseas. Is this ok?

Yes. The reason for this is often because the person with control over the trust is overseas, but they want the trust to be resident in Australia, meaning they need an Australian trustee.

The more important thing is that a beneficiary is represented as an appointor (though even this may not be crucial), because the appointor(s) can remove the trustee and appoint a new one if they like. This effectively means the appointor has overall control of the trust at the end of the day.

Does your system integrate with CAS 360 for trust establishments?

Yes! When you establish a trust with InterDocs, we can set up the trust in your CAS 360 software without you needing to re-key the information. Read how to do this here.

Does the InterDocs discretionary trust deed provide the ability to stream different forms of income (for instance, both business and passive, such as interest and dividends) as well as any capital gains that might arise?

Yes, our discretionary trust deed does specifically enable the trustee to “stream” or categorise different types of income, to the extent that this may be done under the applicable tax laws.  Refer in particular to subclause 5.5 and subclause 5.6 of our discretionary trust deed.


However, restrictions apply in relation to the ability of a trustee to “stream” income of a trust, in particular following legislative amendments in 2014 or thereabouts, irrespective of the provisions of the trust deed.  

How broadly is 'income' defined in InterDocs's discretionary trust deed?

While “income” is not defined in our discretionary trust deed, our trust deed does provide that the trustee may determine the income for each financial year, and may determine whether income is to include any capital gain. 

Refer in particular to subclause 5.1 and subclause 13.17 of our discretionary trust deed.  Also refer to subclause 5.2 in relation to default determination of income.

My client's trust is going to purchase residential property in Victoria and I have already purchased a kit (trustee's determination) to exclude foreign beneficiaries from my client's trust deed (based on VIC). Should the resolution still be effective, or do I need to now vary the deed?

Our deeds (both regular and foreign exclusion) allow the trustee to exclude potential beneficiaries by resolution, and this should be effective, as it’s a legitimate power provided under the trust deed. However, due to the explicit language used by the SRO in its announcement (which refers to trust deed amendments), going forward, we recommend amending the deed rather than rely on resolution.

That said, if your client has used a resolution, this should still work (but employees of the SRO may not accept it, as they are unlikely to be trust law experts, and therefore the clients should be aware that they may encounter some push-back, and administrative hassle, or maybe even litigation to prove their point).

Read here for more information.

If you have purchased a kit and decide to now vary the deed based on Victorian legislation, please contact us.

What does "resettling" a trust mean?

When a "resettlement" occurs, the old trust is considered to come to an end and a new one begins. This generally happens where the trustee undertakes to do something (a new "trust") not considered when the trust was first established by the original settlor - therefore, the trust has been "resettled". Effectively, the old trust disposes of all of its assets to the new trust, giving rise to CGT and stamp duty issues.

It is commonly accepted that small changes to a trust deed, such as the addition of a trust power, will not resettle the trust, but the adoption of an entirely new deed, can resettle the trust.

My client has changed their name since their trust was established and now the bank is requesting their new name be reflected in the trust deed. Can InterDocs assist with this?

As long as the person is remaining in their role within the trust (i.e. as trustee/appointor/beneficiary/unitholder) and has only changed their name, you should keep a copy of the name change documents/marriage certificate with the trust deed and this should be sufficient.

However, if a third party (such as a bank) insists on this being reflected in the trust deed, we can prepare a deed of confirmation to show that, although the person has changed their name, they still remain in their role(s) in the trust. Our fee for this service is $350.

(It is rare that this will be required; keeping the name change documents/marriage certificate with the deeds is usually sufficient.)