The Short Lives Of Testamentary And Family Trusts
Trusts, which are colloquially known as “testamentary” or “family trusts” have one thing in common. That is that the Trustee can pick and choose from within a wide group of beneficiaries how to distribute the trust income and capital from time to time.
This provides significant opportunity for a reduction of various taxes, protection from creditors and estate planning generally. However, unlike companies, such trusts cannot go on forever.
Rule against Perpetuities
In Australia and other common law countries, a general rule, known as the “Rule against Perpetuities”, fixes a period beyond which the trust can no longer work in that way. At the end of that period, the trust will become a fixed one, identified beneficiaries become entitled to the trust fund and the trust may have to be handed over to them. That is referred to as the trust “vesting”. The date of this vesting is often referred in trust documents as the “vesting date”, “distribution date” or something else.
The maximum period
The maximum period is 80 years in New South Wales, and several other states. However, many testamentary trusts and family trusts have set their vesting dates at a maximum far less than 80 years. This is particularly the case with such trusts set up before 1990 but even some trusts set up after that date have reduced periods.
Gina Rinehart family litigation
The well publicised litigation within the Gina Reinhart family relating to the Hope Margaret Handcock Trust, is a timely reminder of the problems which can arise from a family trust having a vesting date.
The problems with trusts vesting
Usually, the document setting up the trust (a will or a trust deed) will describe who the beneficiaries are who will become entitled to the trust fund on the vesting date. For example, it might provide that the trust fund must go in equal shares to the children of a named person. Some provide that it shall be divided equally amongst all of the beneficiaries described in the document who are alive on the vesting date, in equal shares. But some say nothing about who shall become entitled to the trust fund.
Some of the problems this can create are:-
- significant Capital Gains Taxes and stamp duties becoming payable;
- the trust fund or, a share of it, passing to the creditors of one of the beneficiaries who has become bankrupt;
- the trust fund passing to someone never intended to take the fund such as a son-in-law or daughter-in-law;
- where the description of the beneficiaries is very wide (as is usually the case) a vast and unintended number of the beneficiaries becoming entitled to the fund;
- where it appears that there is no one entitled to the trust fund, possibly all of it passing to the government;
- where the vesting date has passed, but when overlooked, the trustee paying money or transferring assets to people who are no longer entitled; and
- exposing the trustee to personal risk.
How to avoid early or accidental vesting
Act, before it is too late. This involves:-
- checking the vesting date in the will or trust deed and the provisions there about what happens on the vesting date then;
- if desirable and so advised, taking one of the following options:-
- extending the vesting date if the vesting date has not yet arrived and the will or trust deed permits this or it is possible to do so by agreement with the beneficiaries;
- staggering trust distributions over a period of time before the vesting date; or
- making an application to the Court to extend or vary the Trust Deed (although this is the most difficult and expensive course of action to follow).
Consult with us
If you provide us with copies of all of the trust documents setting out the terms of the trust, that is to say, the will or trust deed and all amendments which have been made to it, we can provide you with a fixed price quote to review them and outline for you the options which appear to be available to you. Contact John Stinson, Michaela Money or Louise Bedson on 9222 8000 or email to firstname.lastname@example.org.
The comments in this article are of a general nature. It is assumed that no one will rely on them except for the purposes of obtaining legal advice from a qualified lawyer or other professional.