Family Trust Vesting Day – Time Bombs & Sleeping Giants

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 FAMILY TRUST VESTING DAY – TIME BOMBS AND SLEEPING GIANTS

By Joe Scurria

Director, Avon Legal

Introduction

There are over 700,000 family trusts in Australia, and over 3 million potential beneficiaries. These trusts hold investments such as real property, shares, liquid investments and businesses including goodwill, vehicles, plant and stock.

Trusts provide a number of potential advantages, including:

  • Income splitting;
  • Protection from creditors; and
  • Protecting beneficiaries, for example the disabled and vulnerable.

Vesting Date

It is important to review the Trust Deed to determine when the vesting date of the trust occurs. This is a set date, which commonly occurs between 40 and 80 years after the creation of the trust, or after the death of a particular person or persons. The vesting date of a trust can be brought forward, and sometimes extended, however it cannot infringe the rule against perpetuities.

What Happens on Vesting

Vesting of a trust can be either planned or unplanned.

Planned vesting can be either total or partial, and occurs when trust assets are vested in the beneficiaries as determined by the trustee and guardian.

Unplanned vesting is a total vesting on the vesting date, where there are “takers in default”. This normally results in vesting of trust assets to the primary or specified beneficiaries.

On vesting and disposal of the trust assets by the trustee to the beneficiaries, it is recommended that you obtain independent tax advice as the trust may be liable for capital gains tax.

Additionally the transfer will be dutiable unless section 115 of the Duties Act 2008 (WA) is satisfied for nominal duty.

This means that careful planning for duty and capital gains tax is required.

Housekeeping

It is recommended that you undertake regular trust housekeeping, which should include but is not limited to:

  • getting the trust in order;
  • locating the trust deeds and variations and any changes of trustee;
  • ensuring that the trust deed is stamped, if it was executed prior to 2008;
  • reviewing the balance sheet of the Trust;
  • detailing the trust assets; and
  • retaining proof of ownership of trust assets.

Beneficiary Loan Accounts

These are legally enforceable debts which can be traps for the unwary. These loans can be assigned, gifted or forgiven (subject to tax advice).

Additionally, these loans can have implications in family law proceedings, where the initial contributions of the parties are included as part of the property pool, or the loan is included as an asset available for distribution.

Duty Exemption on Vesting (Duties Act 2008 (WA)).

Planned Vesting

On planned vesting, as provided under s 115 of the Duties Act 2008 (WA) nominal duty of $20 is chargeable on a transfer of dutiable property to a beneficiary of a discretionary trust, if:

  • there is, or will be, no consideration for the transfer; and
  • the beneficiary is an individual who does not intend to hold the property as agent, trustee or otherwise; and
  • at the time when the trustee acquired the property the beneficiary was named or described in the instrument which created the power of appointment as a beneficiary or as a member of a class of beneficiaries; and
  • evidence of the acquisition by the trustee, as trustee, of the property is produced to the Commissioner.

Unplanned Vesting

On unplanned vesting, as provided under s 114 of the Duties Act 2008 (WA), nominal duty is chargeable on a transaction, if there is, or will be, no consideration for the transaction. Section 114 is applicable to a transfer of, or an agreement for the transfer of, dutiable property to a taker in default on the vesting or termination of the discretionary trust.

Conclusion

Know the vesting date of your trust and be prepared for it.

Disclaimer

This paper cannot be regarded as legal advice.

Although all care has been taken in preparing this paper, readers must not alter their position or refrain from doing so in reliance on these papers. Where necessary, advice must be sought from competent legal practitioners.

Avon Legal does not accept or undertake any duty of care relating to any part of the papers including its contents, index, tables, legislation or case index (if any).

Copyright

This paper is copyright.  Apart from any fair dealing for the purpose of private study, research, criticism or review (as permitted under the Copyright Act) no part may be reproduced by any process without written permission.  Inquiries should be addressed to the publishers.

 

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