Trust

HOW We Can help You with your Trust?

Trusts can be a very effective at managing income distribution and tax; protecting assets and managing succession of important assets.  

Lots of people have family trusts but often it has been created for them on the recommendation of their accountant by a lawyer who has given minimal advice or generated by a document service.

In the past many mistakes have been made with the establishment and variation of trusts.  These mistakes can have major consequences for taxation and succession. 

We can help you decide whether a trust is an appropriate mechanism for you; understand your trust and other arrangements; and help you review your trust arrangements.

Issues We Have Seen With Trusts

Mercanti v Mercanti

The relatively recent West Australian Supreme Court decision of Mercanti v Mercanti [2016] WASCA 206 following the earlier Queensland decision of Jenkins v Ellett [2007] QSE 154 has highlighted significant risk and widespread failures in attempts to amend and change control of discretionary family trusts as well as existing problems with the proper administration of those trusts particularly in relation to determinations on the distribution of income.

Failed appointments of Guardians and Appointors

In these decisions there were questions concerning whether the appointment of subsequent guardians and appointors were valid. The appointments were effected by variations and the variation clause in the trust deeds was found to be limited to any new or other trusts or powers.

The Court applied a narrow interpretation to these words to mean only clauses relating to the “trusts” could be varied and “new…[trustee] powers” could be declared.  In particular, it did not enable the variation of existing powers nor amendments to other terms, conditions and provisions of the trust deed. In particular, definitions of appointors and guardians, which were identified by the court as “terms and conditions”, could not be changed.

The consequence in Mercanti was that the deed amending the trust by changing the definition of appointor and guardian in the schedule was ineffective and the guardian and appointor had not changed.

This decision has serious consequences in that the variation clause considered in the case is in wide spread use and this means that many discretionary family trust may not be legally in the control of the person who is presumed to be in control of it and all of their acts may be void or voidable.

This could result in the loss of control of the trust and its assets and past decisions being ineffective.

Often this situation can be rectified, but it is important to rectify it early and, in particular, before relevant people are deceased after which it may not be possible to rectify the issues or rectification is made more difficult because beneficiaries with contrary interests may now need to agree.

Failed Determinations in relation to Distribution of Income

Related to this, but also separately, we have found many cases where the trust provides for a guardian (or principal) whose consent is required for distributions of income before the end of the financial year. This requirement is often overlooked and consent has not been given or has been given by the wrong person.

These income distribution clauses normally provide that income not properly distributed is to be paid to the default beneficiaries (often referred to as “primary beneficiaries” or “income beneficiaries”).  This might be the correct result but often is not.  This could have significant taxation consequences.  It could also mean that distributions in the past have to be repaid  – over may years this may be hundreds of thousands of dollars.

It may be possible to rectify this if acted on quickly.

Income Distributed to People and Entities who are not Beneficiaries

Another issue we have seen arising is income being distributed to people who have been presumed to be beneficiaries but are not beneficiaries or due to a Mercanti issue have not been properly appointed as beneficiaries. This is also potentially rectifiable provided it is attended to early.

Recommendations

Accordingly, we recommend the following:

1. Have trust deeds and variations checked by Williams Law Company for Mercanti issues.

2. Familiarise yourself with the income and capital distribution provisions and ensure that all determinations and distributions have been made in accordance with the terms of the trust deed and, in particular, satisfy any requirements for consent of the guardian. If in doubt ask a lawyer.

3. Consider whether the office of guardian is necessary and whether the risks could be reduced by removing the powers of the office.

4. When making income distribution determinations, check to ensure that the intended beneficiary is an actual beneficiary of the trust.

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