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The Problem
Over time a client's family circumstances change including death, divorce, dementia and bankruptcy. This means that the family discretionary trust will also undergo changes including the change of the appointor to the trust, the trustee, a name change after a divorce or the deletion or addition of beneficiaries.
A Big Danger
At Abbott & Mourly Lawyers we recently were asked to deal with the administration of an estate including a $1M + discretionary trust where the sole Trustee and Appointor died. The trust was established for the benefit of the deceased's spouse and children. However the deed stated the only person who could appoint a new Appointor was the appointor (deceased) and the only person who could appoint a new Trustee is the Appointor (deceased). This trust is in limbo and an expensive application must be made to the Supreme Court to sort this mess out and in the meantime the grieving spouse cannot access any monies from the Trust. Poor advice but we see it everyday.
The question is "how up to date are your client's discretionary trust deeds?"
Resettlement or Not?
We need to get this out of the way because it has been a myth that any minor change, such as a beneficiary, change in vesting date, change in trustee or appointor may create a new trust or a resettlement of an existing trust and thereby result in capital gains tax and stamp duties.
The Commissioner of Taxation has addressed this issue in TD2012/21 where he stated that, despite such changes that, provided there is a continuity of the trust then there is no CGT or carry forward of tax loss issues. However he noted that any amendment must be in accordance with the trust deed variation or amendment clause or a new trust may arise. The Commissioner provided a number of examples where the trust continued despite changes to the positions of the Trust:
Example 1: addition of new entities to, and exclusion of existing entities from, class
of objects
The Acorn Trust is a family discretionary trust that was settled to benefit the members of the Squirrel Family. Under the terms of the trust deed the trustee (a private company of which Mr and Mrs Squirrel are directors) has the power at its absolute discretion to appoint income to any one or more of the General Beneficiaries. The General Beneficiaries are defined under the terms of the trust deed to be Mr Squirrel, his wife, their children, their grandchildren, and Oak Pty Ltd, a private company through which the family
runs a business of growing flowers to supply local florists. 3. Having decided to get out of the flower industry, the Squirrel Family dispose of their interests in Oak Pty Ltd to an unrelated third party.
The trust deed for the Acorn Trust provides for a procedure for the trust to be amended, namely by trustee resolution recorded in writing. Pursuant to this procedure the trustee resolves in writing to amend the deed to specifically remove Oak Pty Ltd by name from the class of General Beneficiaries. The trustee further resolves to add to the class of General Beneficiaries:
- the respective spouses of the children;
- trusts and companies in which the family has a majority controlling interest;
and - a philanthropic charity unrelated to the Squirrel Family.
The making of these resolutions, being a valid exercise of a power of amendment contained within the deed, does not give rise to the happening of a CGT event.
A Simple Case Study
The Smith Family Discretionary Trust was established in 2015 with John Smith as the appointor, John and his then wife Sally as the trustees and both of them being principal beneficiaries. As part of Family Law Court Orders John must remove Sally as trustee and principal beneficiary.
Adviser Solution
If you are looking at making changes to an existing discretionary trust there are two solutions:
1. No Deed Upgrade
If the Trustee client is comfortable with the existing deed then you can use our Change in Trust Positions document that enables changes of trustees, appointors, beneficiaries, guardians as well as being able to change the name of the Trust - all with no resettlement: Document name: Changes to Discretionary Trust Positions and Name - You can find this document when logging into your account and clicking on the Document Wizard in Templates / Trusts Maintenance / Standard Trust, Other Trust Documents and Minutes folder or simply search the file name.
2. Deed Upgrade
1. Upgrade the client deed to a LightYear Docs strategic discretionary trust which will cover a change in positions and vesting: Document name: Upgrade of Discretionary Trust to a LightYear Docs Strategic Discretionary Trust - You can find this document when logging into your account and clicking on the Document Wizard in Templates / Trusts / Maintenance / Simple but Strategic Discretionary Trusts folder or simply search the file name.
2. If you are after a family lineage solution then upgrade to a LightYear Docs Leading Member solution which focuses on building a succession of Leading Member appointors with each Leading Member appointor being the principal beneficiary and their children, potentially their spouse (if desired), grandchildren and blood relatives are also beneficiaries. To upgrade, document name: Leading Member Discretionary Trust (Individual and Corporate) - You can find this document when logging into your account and clicking on the Document Wizard in Templates / Leading Member / Trusts folder or simply search the file name.
Recommended Fees
If it is a change in positions the fee should be $750 and if the deed is to be upgraded to a modern discretionary trust deed then an additional $450 or if a Leading Member discretionary trust is chosen for family lineage protection then an additional $1,500.
Important: If you are upgrading and don't feel comfortable doing it yourself contact us grant.abbott@abbottmourly.com.au or tanamourlis@abbottmourly.com.au to get a quote on one or more deed upgrades. Importantly all of our deeds do not require the Trustee to adopt Australian accounting standards providing the Trustee with flexibility to self assess its financial reporting rather than having to adopt financial standards under AASB 2020-02 which has a mandatory adoption date of 1 July 2021!
P.S. if the client has property within the trust do not get caught out by the foreign beneficiary land tax surcharge by using our non-foreign person beneficiary trusts. If you are not sure press the Support button on the LightYear Docs site: www.lightyeardocs.com.au for technical and legal support on us.
Please be advised this is general information only, and is not to be taken as legal advice. If you would like more information, or have a legal query, please contact Abbott & Mourly directly.
Reviewed: 18/01/2024