Do you have trust issues? Varying the trust deed
Be vigilant of the variation! In part three of our trust series, we examine varying trust deeds and some common issues we are seeing with the variation power, particularly when attempting to deal with the future control positions such as appointors or guardians. These can have potentially disastrous results if not done properly, including the wrong people ending up in these positions.
Why vary the trust deed?
Reasons for varying a trust deed include:
- to change income definitions;
- to change beneficiaries;[1] and
- to change the control of the trust by changing the appointors or trustees.
Varying the trust deed
There are several questions that need to be asked before the power of variation is exercised.
Who has the power of variation and is this limited or restricted?
The trustee is most often given the power to vary or amend a trust deed. These powers can take many forms, some with more limited application than others or restrictions on their use. For instance, prior to exercising the variation power, the trust deed may require that the trustee obtain approval from the appointor or guardian or provide them with written notice.
Is the proposed variation within the scope of the trustee’s power?
A variation power must be exercised in the interest of the beneficiaries of the trust as a whole,[2] in good faith and for the purpose it was provided, and not in excess of that purpose.
Does the variation lead to a resettlement of the trust?
Resettlement of a trust can occur if the variation either:
- terminates an existing trust; or
- causes trust assets to be held under a different charter of rights and obligations.
The more expansive the changes (such as a wholesale replacement of a discretionary trust deed), the greater the risk.
Can you use the variation power to change the control of the trust?
Most trust deeds contain specific powers that allow for the nomination of successor appointors or guardians. In the first instance, these specific powers should be used instead of the variation power. In Mercanti v Mercanti the Court confirmed that the terms of the specific power to appoint a successor appointor will govern that appointment.[3]
Where there is no specific power, caution should be exercised when using the variation power to deal with the succession of controlling roles of the trust, particularly where there is uncertainty as to the scope of the power. Many older trust deeds with narrow variation powers (such as ‘trusts hereinbefore’) cannot be effectively used to change these roles or nominate successors.
Key takeaways for trustees
When considering a variation you should:
- always carefully read the deed and understand the terms of any variation power (including any limitations or restrictions);
- be aware of the financial consequences of ‘resettling’ a trust and consider any potential CGT and stamp duty consequences before exercising the variation power; and
- in the first instance, look to a specific power to deal with the succession of the positions of appointor and guardian rather than the variation power.
Advisors and clients should seek legal advice if there is any uncertainty about a proposed variation to a trust deed, especially where this deals with future control positions such as appointors or guardians.
[1] The 31 December 2020 introduction of additional duties and tax on residential property held by a foreign person in New South Wales saw many trust deeds in NSW, and other jurisdictions, being varied to exclude foreign beneficiaries.
[2] Lock v Westpac Banking Corporation (1991) 25 NSWLR 593, 609, citing Metropolitan Gas Co v Federal Commissioner of Taxation (1932) 47 CLR 621, 633.
[3] [2015] WASC 297, 99.
[4] For instance, in the case of Re Owies Family Trust [2020] VSC 716, 74 the scope of the variation power was restricted to ‘trusts hereinbefore’, and it was held that the power could not be used to vary the definitions of appointor and guardian as these were ‘provisions’ and not ‘trusts’.
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