by John Wojtowicz (Director - Law Central Legal)

A Trust is an arrangement whereby assets are held by the trustee on behalf of beneficiaries. In Family Trusts, it is up to the trustee to decide how distributions are to be made. However, when a Trust ‘vests’, beneficiaries will be entitled to the assets of the Trust fund. A trustee can decide to liquidate assets and distribute the cash proceeds to beneficiaries or alternatively, directly distribute assets in their existing form (this is known as an in-specie transaction).

Why do trusts vest?

Trusts vest for a number of reasons.  The rule against perpetuities prevents a Trust from existing indefinitely. In Victoria, Queensland, Tasmania and Western Australia, legislation provides that the maximum duration of a Trust is 80 years from the date of its establishment. In South Australia, Trusts do not have a perpetuity period.

Alternatively, a trustee may decide for various reasons to vest a Trust early and distribute the Trust property. This may be due to family disputes or a need to access the Trust funds sooner rather than later - for example ill health. A Family Trust may no longer hold any long term benefit, and could incur additional compliance costs each year.

When is the vesting date?

To find the vesting date of your Family Trust, look no further than the Trust deed. Most Family Trust deeds have a standard vesting date of 80 years from when the Trust was established. However, some Trust deeds are different; for example a Trust may vest on the death of a specific person or in any number of years. Make sure to find out the vesting date of your Family Trust and keep tabs on it.

As a trustee I’ve chosen to voluntarily vest the Trust… what now?

Read the Deed: Make sure you have the power to vest the Trust. Most Trust deeds confer this power; however usually the consent of a guardian may be needed. Check the Trust deed to see if it contains a discretion for the trustee to payout capital and income.

Decide how the Trust is to be wound up: Whether you decide to liquidate the assets of the Trust or distribute them in-specie, it is crucial that you review the Trust balance sheet. Before you distribute assets you must discharge all outstanding debts and liabilities. If a Trust fund has limited assets you may have to liquidate them in order to do this.

Discharge outstanding liabilities: Trustees are usually indemnified by the assets of a Trust. This will either be set out in the Trust deed itself or relevant state legislation. Because of this, it is vital that you discharge Trust debts before distributing assets.

Under the Trustees Act in each state (or the Trusts Act in Queensland) the trustee can be afforded protection against unknown creditors of the trust by advertising or giving notice in the relevant print media of the trustee’s intention to wind up the trust estate. The legislation varies from state to state and the trustee should ensure that the provisions of the relevant section are followed and complied with to obtain the protection afforded by that legislation.

Creditor Loans:

Any debts owed by the Trust must be discharged. This includes loans to banks, third parties, other family members and beneficiaries.

Beneficiary Loans and Unpaid Trust Entitlements:

When discharging outstanding liabilities, bear in mind beneficiaries. Although it may not spring to mind, if beneficiaries have entitlements that are unpaid, these will in some cases be considered loans to the Trust. Check the trust records first to see whether the outstanding amount is classified as a loan or an unpaid trust entitlement. Make sure to consider them alongside other creditors.

Prior to the vesting of the Trust, the beneficiary may, in the case of a debt/loan owing, forgive that debt or in the case of an unpaid trust entitlement, release the trustee from its obligations in relation to that entitlement. These issues will be addressed in a future newsletter.

Consider Tax Implications:

Any capital gain that is derived by the Trust under CGT events A1, E5 or E7 would form part of the Trust net income.

In relation to the stamp duty or transfer duty consequences, the relevant conveyancing rates may be applied unless an exemption under the relevant State legislation is applicable (this exemption normally applies to in-specie distribution of dutiable property from a Trust to a beneficiary). For queries, contact John Wojtowicz at Law Central Legal by email on john.wojtowicz@lawcentrallegal.com.au.

For an explanation of “the Commissioner’s views about the immediate income tax consequences of a trust vesting” and a discussion of “certain issues that can arise when the vesting date of a trust is mistakenly thought to have been extended” see Taxation Ruling TR 2018/6.

Consider Beneficiaries and the Duty of the Trustee to Give Information to a Beneficiary - Gold and Platinum members read on:

When deciding to vest a Family Trust there are a number of things to consider including: tax, beneficiaries and creditors. Law Central has taken the work out of this for you by providing you with our Family Trust - Vesting, Forgiveness of Debt and Release of Unpaid Trust Entitlement Deeds. Get started by building these documents online.

For advice contact John Wojtowicz at Law Central Legal via email john.wojtowicz@lawcentrallegal.com.au.

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central recommends you seek professional advice before taking any action based on the content of this Bulletin

Related documents:

• Family Trust - Vesting
• Family Trust
• Family Trust - Streaming & Bamford Update
• Change Trustee of Family Trust

Related webinars:

• Webinar Recording - Fixing Family Trust Deeds
• Webinar Recording - The who, what, when & how of Family Trust Elections
• Webinar Recording - Beneficiary Entitlements in Trusts
• Webinar Recording - Winding Up Trusts and Tax Consequences