27/01/2016

Until a few years ago amending family or unit trust deeds was fraught with danger.  Now such amendments can be made safely and so trustees need to consider whether their old deed would benefit from a facelift.

Discretionary and unit trusts have been around for a while and it is not uncommon for people to sign a trust deed without realising how obsolete it tends to become as time passes by.

We all know that the trust deed dictates what the trustee of the trust can and cannot do, so it comes as no surprise when we say that a trust deed should be regularly reviewed to make sure the trustee has access to the latest strategies to maximise the tax advantages of the trust.

So let’s have a quick look at some of the reasons why a trust deed may need updating.

Tax on income & trustee powers

One of the most popular reasons is the impact of the High Court decision in the Bamford case in 2010 on the taxation of trusts.  

Put simply, the decision relates to the ability of the trustee to determine what is income and what is capital gain when it comes to trust receipts.  That decision can affect the tax liabilities of beneficiaries and the timing of that tax.  With an old trust deed, odds are the trustee is unable to stream revenue effectively and beneficiaries are paying too much tax. Updating the trust deed is likely to improve the tax outcome of the trust.

If the trustee wishes to take advantage of the new trust streaming measures, it must be expressly empowered by the trust deed to stream capital gains and franked distributions to particular beneficiaries.  

Early vesting date (or perpetuity period)

Some older trust deeds have a shorter vesting period than the now standard 80-year period (e.g. 40 years or the day of a specific event).  When the trust ends on the vesting date, the trustee has to distribute all of the trust assets to the beneficiaries in accordance with the trust deed.

If this time comes earlier than anticipated by the trustee (who’s caught by surprise by the early vesting date), the process may result in detrimental tax and revenue consequences (e.g. CGT).  Amending the trust deed to extend the perpetuity period may help avoid such potentially costly surprises.

Excluding beneficiaries

If the trust is in NSW and has individual trustees, odds are the trust will need to change trustees at some stage during that 80-year vesting period (when one of them dies or becomes bankrupt, for example).  As it is common for the continuing trustees to be beneficiaries under the trust deed, this means that any transfer of property from the old trustees to the new trustees would be liable for full stamp duty on the value of the property.

With a little planning and forethought the trust deed can be amended at the right time and in the right way so that only nominal duty is payable on that transfer.

While there may be good reasons why a trust deed needs to be updated, they may not be relevant to a particular trust because of its use and activities, so it is not a good idea to do so just for the sake of it.  However, should the trustee decide to update its trust deed, the amending process has to be done carefully so it does not cause more harm than good (for example by causing a re-settlement of the trust, which has major detrimental tax and stamp duty implications).  

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.