Passing Control of Trusts to the next generation. How to get it right!

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Good estate planning starts at the beginning of one’s working life, not at the end.

In the early 1980s, many family trusts were set up with a vesting date of only 40 years because it was considered the best way to avoid the uncertain issues relating to the anticipated introduction of capital gain tax (which was introduced in 1985).

Many of these trusts are now close to their vesting date. 2020 is fast approaching!

We have been approached numerous times in the past 12 months to extend the vesting date of such trusts to the maximum period permitted in NSW – 80 years.

The issue of extension of a trust’s vesting date was addressed most recently in the Federal Court’s decision of Clark v Federal Commissioner of Taxation [2009] FCA 401 (Clark’s case) but problems still remain.

One of the chief issues is that some trusts are worded in such a way that the perpetuity period is clearly a fundamental feature of the trust deed.

If the Commissioner of Stamp Duties holds this view in relation to a particular trust then he will conclude that any amendment to the vesting date will trigger a resettlement with duty applying to the new trust created by the deed of amendment at ad valorem rates.

In a recent successful private ruling application made by ourselves, the Commissioner made reference to TD 2012/21, which in part states that CGT Events E1 or E2 will not happen if the terms of the trust are changed pursuant to a valid exercise of the power to vary contained within the trust deed unless the amendment causes the trust to terminate for trust law purposes.

In our application, we address the issue of the power to vary. The power to vary was found in clause 14 of the trust deed. It provided that the trustee had the ability to “remove, alter or vary any trust or provision hereunder… and… to resettle the trust in such manner and upon such trusts and subject to such conditions and in such proportions and with such powers and to such ends, intents and purposes to or among such one or more of the beneficiaries, as the trustee may from time to time think fit provided that the trusts and powers contained in any such settlement shall not infringe the rule against perpetuities”.

The Commissioner accepted our argument that the power to vary conferred fairly wide discretionary powers to add to or vary the provisions of the trust deed in relation to the management and control of the trust and the trustees’ powers or discretion.

The Commissioner also accepted our argument that the qualification that the variation power must be used in a manner as to not infringe the rule against perpetuities suggested that the settler specifically contemplated that such an extension of the perpetuity date (the vesting date) could be effected by exercise of the power under clause 14 and that the use of the amendment power to achieve that extension would be allowable provided that it did not infringe the rule against perpetuities.

The Commissioner noted in his ruling, accepting the argument of Owen Hodge Lawyers, that the vesting date was to be extended but it would not breach the rule against perpetuities because it requires the trust to vest no later than 80 years from the date of the trust deed. The Commissioner therefore concluded that it was a proper use of the trustee’s amendment powers in clause 14 to extend the vesting date as such.

Furthermore the Commissioner agreed with us that the proposed amendments would neither impact on the continuity of the trust, nor on the trust membership principles as set out in Clark’s case (above).

In addition, the Commissioner accepted that the proposed amendments would have no impact on the beneficiaries’ interests or the trustee’s holding of trust assets and would not lead to a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that the asset has been settled on terms of a different trust.

Moreover, the Commissioner in agreeing with us, formed the view that there was to be no change in the legal and beneficial ownership of any asset (discussed in Taras Nominees Pty Ltd v FCT 2015 ATC 20-483) and so CGT Event A1 would not occur on the making of the proposed amendment.


There is a lot to think about!

If your want the life of your trust extended or any other changes made to it (for example, adding beneficiaries or deleting beneficiaries) – give Leigh Adams at Owen Hodge Lawyers a call on 02 9570 7844.

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We are always ready to help you.