From their emergence into the ‘popular consciousness’ in the 1960s, discretionary (family) trusts have become a popular vehicle1 for many financial and economic applications. From relatively raw beginnings of professional advisers grappling with the nature of this legal structure and seeking to apply historic principles to modern economic life, through to the modern complexity that now pervades them, discretionary trusts have provided financial benefits that range between asset protection, taxation management and the ability to distribute income and capital on a discretionary basis that cannot readily be provided by any other structure.
At their heart, trusts generally (and discretionary trusts inclusively) operate on a simple premise: assets are ‘settled’ on a trustee under terms established by agreement (and in all formal applications, expressed in writing) under a deed to be managed for the benefit of persons or entities identified in the agreement as beneficiaries.2
Generally speaking, the Trust Deed is very specific about the roles and responsibilities of the trustee and about the powers and authorities under which they operate. They usually provide for those terms and conditions to be able to be varied from time to time – and they invariably provide for the trust to vest at a specific point in time; or on the occurrence of a specific event.
Modern taxation practice has seen the exploitation/ application of the benefits of this flexible structure to numerous business, investment and asset-holding situations. As legislators seek to preserve fairness and equity in taxation, welfare and community well-being they have introduced ever-increasing complexity to the laws that affect the way trusts are perceived – and operated.
Now more than ever the rationale for including a trust structure in an economic unit needs to be considered very rigorously to ensure that the economic and strategic benefits warrant the costs that are associated with conducting the proposed activity under that vehicle.
What are the costs; and why are they unavoidable?
To take advantage of the asset protection, the assets must be held in the proper name of the trust (usually, though not always including the name of the trustee). If this has not been consistently been the case during the life of the Trust (or at least during the period of ownership of the asset by the Trust), continuing benefits of ownership of the asset will be at risk. Costs will be incurred if the asset is then sought to be moved from the current ownership title to the correct title: those costs will probably be higher if the trustee waits until there is a claim on them before acting.
To take advantage of the taxation benefits that are available, very specific attention needs to be paid to a number of factors:
- the Deed provisions in relation to identification of income must be specifically applied;
- the trustee must resolve to distribute the income for each financial period in accordance with the Deed provisions (as to determination of what is to be distributed, specifically to whom what elements are to be distributed and the timing of making the determination); and
- the taxation rules themselves need to be understood and applied correctly.
The costs involved in this part of the process arise from the need to –
- maintain securely, copies of the original Deed together with any Deeds of Variation that have been properly drafted and executed;
- regularly review the Deed to ensure that it has not vested; that the income for the period has been properly disclosed and brought to account; that the beneficiaries to whom distributions are proposed are correctly able to benefit from the Trust (and that they hold current Taxation File Numbers);
- ensure trustee minutes, especially those providing for distribution of income for the period, are prepared in respect of a resolution of the trustee made before the end of the final day of the period (usually 30 June) – and that ALL resolutions by trustees are documented.
The risk to the benefits available under a Trust structure of failing to attend to all of the above issues properly and meticulously are that the taxation laws (including those established under Court decisions) may preclude the beneficiaries from their concessional ‘entitlements’; Family Courts may rule that the assets hitherto presumed to belong to a Trust in fact fall outside that structure and are divisible; and ‘equity’ Courts may find that the assets are available to personal creditors.
Are Trusts suitable for any and every circumstance?
A few pointers that need to be considered in relation to Trusts:
- assets held in a Trust are not assets that can be devolved under a Will;
- certain control aspects of a Trust MAY be able to be dealt with under a Will;
- a business wishing to undertake Research & Development and seek government support for that under the taxation system will not be able to do so under a Trust;
- inappropriate exercise of control and dealing with Trust assets may see them deemed to be personal assets, not entitled to the benefits and protections presumed to exist; and
- the costs of unwinding a Trust if the costs eventually are seen to outweigh their benefits, may also prove challenging.
Your experiences ? –
Please feel free to Comment below if you have any experiences with any of the following circumstances (or indeed any of the matters raised above):-
- Have you ever come across a situation where you were unable to find an original signed copy of a Trust Deed that you are trying to operate under/ advise on? If so, how did you overcome that situation?
- Have you had assets stripped from you that you believed were protected under a Trust? Are you able to share with the readers what the circumstances were (anonymously of course)?
- Do your accountant and lawyer regularly review your Trust Deed to ensure that all relevant provisions are up-to-date with current practice?
- Can you identify which of the assets that you manage are personal as opposed to Trust assets?