When to review your client’s discretionary trust deed

Discretionary trusts are usually established for tax and asset protection reasons. Given your client’s trust may hold a significant proportion of their wealth, it is important that the deed is up to date from a tax, asset protection and succession planning perspective.

The older the deed the more likely there are to be problems. However, even trusts established recently may have been set up primarily for tax reasons with little attention given to what happens to the office of the appointor in the event of their death or incapacity or how decisions are to be made and deadlocks or disputes resolved if more than one person is controlling the trust.

The following non-exhaustive list provides examples of triggers to review and update your client’s trust deed(s).

However, care must be taken and advice obtained to avoid causing a resettlement of the trust.

Does the trust own residential property and have a wide class of beneficiaries which could include foreign relatives?

If so, the trust could qualify as a ‘foreign trust’ for the purposes of the Victorian Duties Act 2000 or a ‘foreign person’ for the purposes of the New South Wales Duties Act 1997 and also be considered a ‘foreign person’ for the purposes of the Foreign Acquisitions and Takeovers Act 1975. This could result in additional land tax and stamp duty liabilities which could otherwise be avoided.

When does the trust end (usually defined as the vesting date)?

In all states other than South Australia trusts can only last for up to 80 years, but older deeds may have shorter vesting dates.

Does the deed allow the trustees to do what they are doing, eg risky investments or power to borrow?

Older deeds, in particular, may not include powers which a trustee running a business or investing in certain assets now requires.

What happens if the appointor(s) resigns, dies or loses capacity?

Without detailed provisions, there is no adequate succession plan for the passing of the ultimate control of the trust to family members. The deed should allow for replacement, additional and successor appointors to be appointed by deed during the appointor’s lifetime and by will on death. It should also deal with what happens if the appointor loses capacity.

What if there is more than one appointor?

The deed should deal with whether decisions are to be unanimously (which will be the case if the appointment is joint) or by a majority. However, it may be appropriate for some key decisions to be made unanimously and others by a majority.

What about disputes and deadlocks?

Ideally, there should be dispute resolution mechanisms (including the requirement to use mediation before issuing court proceedings) to deal with disputes between trustees and/or appointors and/or beneficiaries, and in the case of multiple trustees and/or appointors to resolve deadlock or disputes.

Do more trustee powers need to be subject to appointor consent?

Often the appointor only has the power to hire and fire the trustee, but it may be appropriate for asset protection and control reasons to ensure that certain key decision (eg appointment of capital/income, changing the vesting date, appointing/removing beneficiaries, agreeing its remuneration, delegating, etc), are subject to appointor consent.

If the trust has a corporate trustee, it may be advisable to update the trustee company constitution to create special classes of shares with rights for family members to appoint directors and to deal with disputes or deadlocks to achieve the client’s succession planning intentions.

Are there specific powers to ‘stream’ different categories of income and capital?

These should be broad enough to allow specific income/capital recording/streaming in relation to all different categories of income and capital (eg capital gains, franked dividends, exempt income, foreign income).

Can taxable capital gains be recognised as trust income?

If taxable gains cannot be recognised as trust income, this may mean that such gains may be taxed in the hands of the trustee at the top marginal tax rate – or be unfairly taxed in the hands of beneficiaries who cannot receive the benefit of it, whereas if there is this power, the gain may be able to be distributed to one or more beneficiaries to be taxed in their hands at their marginal tax rates.

Are there specific powers to allocate income or capital to be held on trust for beneficiaries?

If there is no power to permit unpaid present entitlements of a corporate beneficiary to be held on trust in such a way as to avoid them being treated as a deemed dividend paid by the corporate beneficiary to the trust, will be adverse tax consequences.

Are there powers to enable the trustee to distinguish between different types and categories of expenses (such as tax deductible or non-tax deductible) and to treat them differently from each other for tax reasons?

What happens if the trustee goes bankrupt or insolvent?

If the trustee goes bankrupt/insolvent, their trustee in bankruptcy could take control of the trust. If that trustee is also a beneficiary, the trustee in bankruptcy may use its powers to distribute trust income and assets to the bankrupt or insolvent beneficiary. There should be provisions for the automatic disqualification of an individual trustee regarding bankruptcy/insolvency and a corporate trustee regarding legal/other disability (such as bankruptcy/ liquidation) or of a voting majority of directors or shareholders.

Is any trustee indemnity against any beneficiary excluded?

At general law, a trustee is entitled to an indemnity from the beneficiaries which is not usually advisable.

Does the deed need other updates to bring into line with a modern trust deed?

Examples may include confidentiality and trustee disclosure of information and documents to beneficiaries as certain disclosure may be beneficial but not others or the ability of the outgoing trustee to seek an indemnity from a new trustee if the trustee liability provisions are limited as the outgoing trustee will likely want.

Hall & Wilcox provide a tailored approach for each client to ensure we take into account all of their wishes and provide succession planning solutions that achieve their goals. If any of the above triggers apply to your client’s trust deed, please send us a copy of the deed so that we can provide a fixed fee to review it.