Trusts: to vary or not to vary
Our most recent client update was about the recent decision in Re Pickering Family Trusts and the Court’s power to approve a variation where the variation power is limited. Not all variation powers are created equally. Making sure a variation power allows you to vary a trust deed as intended is key, as the consequences of getting it wrong can be critical.
What does the variation power permit?
The terms of the trust deed are key. In particular, the wording of the variation power will set out what it does and does not permit.
A power to vary ‘the trusts declared’ has less application than a power to vary ‘the trusts, powers and provisions of the trust fund, including the schedule to the trust deed’. Some variation powers will also have a requirement to obtain consent, or specifically exclude certain clauses being varied.
In the WA case of Mercanti two trust deeds were varied to deal with the succession of the appointor and guardian roles. Following a family dispute, the validity of these variations were tested. One variation was held to be valid, and the other invalid. The decision turned on the wording of the variation power. The variation that was invalid was a limited power: ‘revoke add to or vary all or any of the trusts hereinbefore provided’. By contrast, the variation that was held to be valid was broader: ‘revoke add to or vary all or any of the trusts terms and conditions hereinbefore’. The words ‘terms and conditions’, or ‘provisions’ provide a much broader variation power.
One aspect of the Victorian case of Re Owies similarly dealt with a variation to the succession of the appointor and guardian roles. The variation power was also limited: ‘vary all or any of the trusts hereinbefore limited’. The Court held ‘trusts’ was limited to the trusts declared under the trust deed, and did not permit the appointor and guardian roles to be varied.
What happens when the variation goes wrong?
When the variation is held to be invalid, there are many potential consequences:
- exercises of discretion based on an invalid power will not be effective, which could lead to other consequences such as invalid distributions and tax issues; and
- variations that deal with succession of control, such as appointors and guardians, will be invalid. This often means the people intended to have control under the variation do not have control of the trust.
It is also important to consider the scope of the proposed variation and whether it may lead to CGT Events E1 or E2. Tax Determination TD2012/21 sets out the position of the ATO regarding trust variations. Provided the variation or amendment is made though a valid exercise of power, there are generally no issues. However, if the variation terminates the trust, or changes the rights and obligations, there may be an issue. The key point here is getting advice if there is any uncertainty.
What if there is no variation power?
If there is no variation power, or the variation power is limited and does not allow the proposed variation, the Trustee Acts in most jurisdictions empower a Court to approve a proposed variation in certain circumstances. Our update on The Pickering Family Trusts is the most recent example of a Court approved variation.
If you are considering varying or amending a trust deed, the key considerations include:
- reading and understanding the scope of the variation power under the trust deed;
- checking if there are any other specific powers that permit the proposed change;
- checking if there are any limitations or consents required; and
- questioning if there any resettlement issues with what is proposed.
Hall & Wilcox has extensive experience in advising on and varying trust deeds in many areas, include income and streaming powers, succession of control, varying beneficiary classes, as well as Court applications and advice regarding potential resettlement issues.
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