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Trust Variation and Updating: Why is it necessary?

  1. Discretionary Trusts
    1. In the 1970s discretionary family trusts flourished in Australia as a taxation minimisation device, offering flexibility and procedural simplicity.
    2. Many accountants and lawyers will, correctly, advise their clients to include a discretionary trust in the business structure in order to take advantage of tax planning strategies.
    3. As the Commonwealth update tax laws, these tax planning strategies are amended to take into account changes to the prevailing tax laws. In order to take advantage of these strategies, it becomes necessary to amend the instruments governing the tax efficient structure.
  2. Why Update the Trust Terms
    1. Clients frequently ask why they need to incur additional expenses in ensuring the trust’s deed is up to date and that the trustee has power to make the resolutions.
    2. Firstly, the ATO regularly update what they are particularly targeting and you will want to avoid a potential ATO audit. For example, in March 2022, the ATO announced a number of guidelines which make clear that it is targeting situations where income of a trust is appointed in favour of a beneficiary but the economic benefit of the distribution is provided to another individual or entity.
    3. Secondly, the trustee is to act in accordance with the deed to ensure the trustee has not breached its duties. As the Court identified in Mercanti v Mercanti, it is perhaps the most important duty of the trustee to adhere to and carry out the terms of the trust. Though unlikely, the trustee (or its directors if a corporate trustee) may be personally liable for losses due to this breach of duty.
  3. Variation
    1. As the Court noted in Global Custodians Ltd v Mesh, the exercise of a power to amend is a very technical matter. For example, what is the difference between the following variation clauses, as they all have different impacts:
      • “revoke, add to or vary the trusts terms and conditions herein contained”;
      • “revoke, add to or vary the trusts terms and conditions hereinbefore”; and
      • “revoke, add to or vary the trusts herein”.
    2. Subject to other terms in the deed, the first allows any clause to be varied, the second allows any clause before that clause to be varied and the last only allows clauses about the trust, which means you cannot change the schedule or powers of the Guardian or Appointor.
    3. This was the reason that in Mercanti v Mercanti, the MMF Trust variation was valid as the clause stated “add to or vary all or any of the trusts terms and conditions hereinbefore” but the FW Trust variation was not valid as only stated “add to or vary all or any of the trusts hereinbefore”.
    4. When reviewing trust deeds, once we ascertain what amendments are permitted, we ensure that the following is updated:
      • various income provisions, such as ensuring a trustee determination creates a vested indefeasible interest and that the trustee has the power to distinguish between and account separately for income derived by the trust from different sources (an income streaming clause);
      • the trustee’s powers, including:
        • borrowing, lending and obtaining financial accommodation;
        • making family trust elections;
        • setting aside unpaid present entitlements;
        • having a personal interest;
        • making in-specie distributions
        • characterising an asset or any gains/losses are income or capital;
      • trust succession, particularly where a particular office is vacated by death, bankruptcy or incapacity; and
      • dispute resolution, for instances where there maybe multiple trustees, appointors or guardians.
  4. Previous Trustee Actions
    1. Should the Trustee have undertaken actions which were not authorised by the trust deed at the time, it is advisable to resolve to ratify those actions. Obviously, this is subject to the terms of the trust deed.
    2. Additionally, if any of the previous deeds have not been validly executed, steps should be taken to correct this error or affirm the earlier deed.