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  • Always take care when dealing with trusts.
  • Seemingly simple transactions can have a big effect on tax.

Can you trust a trust? Not always – there are many murky traps to catch the unaware. Trust disputes depend on the facts – so what happened in these examples may not happen in similar situations – but it might, so beware!

Beware the Appointor

You vividly remember Graham and Gertrude‘s unhappy divorce some years ago. You took great care about control of the family discretionary trust that owned the farm which was to stay with Graham. You made sure Gertrude resigned as director of the trustee company and her shares were transferred to Graham.

But now Graham has come to see you about succession. He wants his daughter, Glenda, to have the farm owned by the trust and his daughter, Gladys, to have the investment property in his name. Gertrude is furious about this, saying Graham has always favoured Glenda and it is grossly unfair to Gladys.

Grace, a bright young lawyer in the firm, says she’s looked at the trust deed and Gertrude becomes the Appointor after Graham’s death. You are embarrassed at missing this but, as the deed has a broad amendment clause, you request that Grace draft an amending deed for Graham to sign.

The trap: Grace politely points out that in Mercanti v Mercanti [2015] WASC 297 it was held that the Appointor’s role is part of the substratum of the trust and cannot be changed by the trustee. The only way to fix the problem is to have Gertrude formally renounce. Your heart sinks.

Beware business successions

Agnes has a son, Arthur, and a daughter, Alice. She wants Arthur to have the family business and Alice to have what’s left, which isn’t much. The business was held in a family discretionary trust of which all Agnes’ extended family were potential beneficiaries. The business was valuable and would trigger a lot of CGT if transferred from the trust to Arthur.

You suggested Agnes simply transfer control to Arthur who could then do what he liked – with no CGT or stamp duty. It worked well for a while – Arthur worked hard, the business grew and Arthur prospered by allocating all the profits to himself.

The trap: It doesn’t always work like that. In Nicholls v Louisville Investments (1991) 10 ACSR 723, dealing with a similar situation, it was held that the brothers always favouring themselves was a breach of trust and an independent trustee should be appointed. So goodbye family business!

Beware the grumpy client

Fred is a widower in aged care. He wants you to fix up his will. Quickly. He tells you his son, Frank, runs the family farm and his daughter, Fiona, is a lawyer. He wants to give the farm to Frank and whatever else he has to Fiona. He’s grumpy and obviously doesn’t like lawyers. You quickly prepare the will, have it signed and send him the bill. It’s not much but he still complains.

The trap: Fred doesn’t own the farm – it’s in a family trust. Fred owns all the shares in the trustee company. So Fiona gets everything. It seems obvious that you can’t give away what you don’t own, but it happened in Public Trustee v Smith [2008] NSWSC 397 where a testator unsuccessfully tried to do just that.

Beware the vesting date

Betty’s accountant, Bronwyn, asks you to fix the deed for her family trust, which was set up in 1982. The vesting date is the earlier of (a) 50 years from the date of the deed; (b) 21 years after the death of the last survivor of the children of King George VI alive when the deed was signed; and (c) whatever date the trustee decides.

Bronwyn says that unless it’s fixed, the trust will vest next year and trigger a massive CGT bill. You tell her the new rule for the life of a trust is 80 years, so you can make the vesting date 80 years after the date of the deed, which puts off the problem till 2062.

The trap: It doesn’t work. In NSW, only trusts set up after the change to the Perpetuities Act 1984, which came into force on 1 January 1984, have 80 years as their limit so you have to stick to the old rule for trusts, i.e. a life in being when the trust was created, plus 21 years (Anloma Pty Ltd (A.C.N. 001 327 448) as Trustee for the Sourry Family Trust [2018] NSWSC 1818).

So when the date in 2022 comes along the trust will vest anyway – and trigger the CGT. And who are the default beneficiaries? Not always who you would wish for.

Jim Main is an Accredited Specialist, Business Law and a certified tax adviser at JMA Legal, Sydney, Cootamundra, Gundagai, Junee and Tumut.