Trust Deeds – are you up to date?

The technical drafting and operation of a trust deed is becoming increasingly important.

A trust deed is a legal document. Each has been drafted by a lawyer at a particular point in time on the basis of an understanding of key issues in the law. There is no standard template.

As accountants we work with a simple rule of thumb:

Read the Deed

A well drafted deed is easy to read, clear in its intent and provides the trustee and interested parties with a balance of certainty and flexibility. Updates to legislation, tax law, case law and your personal circumstances may mean that your trust deed is due for a review and update. Some lawyers draft good trust deeds and others don’t – if the drafting of your trust deed is not up to scratch there is some flexibility for improvement.

What might change?

  1. Family structure and succession planning – births, deaths, marriage, divorce, children growing up and ready to take over control, etc
  2. Definitions of income – there can be differences between accounting and tax income that create risk and opportunity. An example is the recent Cashflow Boost stimulus payments which for accounting purposes are generally considered to be income and for tax purposes are excluded as being Non Assessable Non Exempt. The recent instant asset write off provisions may see for tax purposes an asset is written off in full but for accounting purposes the asset still has a tangible value and useful life for a business.
    To help you achieve an appropriate tax and accounting income we prefer to work with trust deeds that give the trustee discretion to apply either a tax and accounting definition of income (they are different and if you have the time and inclination we’d be happy to try and explain how and why).
  3. Streaming of income. For tax planning purposes you may wish to separately identify and manage ordinary income, capital gains and franked dividends. Your trust deed should be flexible to deal with the High Court guidance in Bamford’s Case.
  4. Plain English drafting. A well drafted deed can be read and understood by you and our accountants. A poorly drafted deed is unclear or written in unintelligible legalese.

We read many trust deeds and speak with other accountants to identify the trust deed templates and legal teams who provide an appropriate document that is effective and clear with a quality legal support team.

A well drafted trust deed is easy to understand and work with. This is an example of a trust deed from one of our preferred legal providers:

  1. The Settlor wishes to establish a trust so that the Trustee can acquire and deal with trust property in its absolute discretion under the terms of this deed, in order to provide benefits to the Beneficiaries.
  2. The Trustee has agreed to act as trustee of the Trust.
  3. The terms on which the Trust is established are set out in this deed.

The parties agree as follows…

 

At times a trust deed gives us headaches. When a trust deed witnesseth, hereinafter the aforesaid provisions in the sixth part of the schedule, we know we have a long day ahead:

(A)          The Founder is desirous of making provision for the Primary Beneficiaries and the General Beneficiaries hereinafter described in the manner hereinafter set forth;
(B)          For the purpose of giving effect to that desire the Founder has settled, or is about to settle, upon the Trustee the sum set forth in the Sixth Part of the Schedule
(C)          The Trustee has consented to become the Trustee hereof upon the trusts and with the powers and subject to the provisions hereinafter expressed.
(D)          It is expressly stipulated that the provisions of section 58 of the Trustees Act 1962 as amended shall not apply to the trust constituted by these presents.

Now this deed witnesseth… [this is a real trust deed and it only gets worse from that point onward!]

We’ll still do our best, however the likelihood of error through misinterpretation is high and the operation of the deed can be as foggy as the language used.

 

If your trust deed is more than 10 years old, has been poorly drafted or does not provide the outcome that you require we recommend an overhaul.

Trust law is complex and can be pedantic. A trust deed can only be amended in accordance with the provisions of the trust deed. You have an option of using a standardised trust upgrade template or a bespoke legal review.

The investment cost for a template upgrade is $650 plus GST including fees for external legal support and our administrative assistance. A bespoke review and upgrade of a trust deed will likely cost multiples of that investment so consider a cost, risk and benefit analysis.

We always do our best for our clients, but please note that a trust deed is a legal document and a detailed analysis is beyond our scope of services to you and outside our training as accountants, so if you would like certainty on the operation of your trust deed or a bespoke review and upgrade of your trust deeds, please let us know and we can put you in touch directly with a lawyer for a review of your trust deeds.

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