Planning for vesting dates

A trust deed may specify a vesting date which is earlier than the 80 year permitted life span for trusts. If that date occurs without appropriate tax planning, it may result in adverse tax consequences for the beneficiaries on distribution of the trust property. A recent case highlights that the Court's consent to variation of the vesting date - to extend it beyond its planned vesting date - is not guaranteed, even if it would allow necessary tax planning before the 80 year period expires. Sarah Watson, Maddocks Lawyers

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Overview

In all states except South Australia, the Rule Against Perpetuities means that a trust must vest by a date which is no greater than 80 years from the settlement date of the trust. Paloto's Case ^[1] demonstrates that:

• if the trust deed does not provide for, or limits, a right of variation, the trustee may apply to a Court to extend the vesting date; and
• Courts may be reluctant to extend the vesting date unless an emergency or urgent situation can be demonstrated.

The facts

Paloto's Case concerned a trust deed made on 8 June 1965. The trust held only ordinary and redeemable shares in a private company.

The Deed gave the settlor the power to revoke or vary the terms of the Trust. In 1974, pursuant to this power, the settlor and trustee executed a variation to the Deed, making a number of changes to the Deed.

The changes included making the Trust's vesting date 50 years after it was originally executed: namely, 8 June 2015. At this date the Trust property would 'vest' in the beneficiaries (be transferred from the trustee to one or more of the beneficiaries). This would result in adverse capital gains tax consequences.

As the Trust's settlor died in 1991, there was no power to vary the Deed. The trustee applied to the NSW Supreme Court to vary the vesting date to no later than 7 June 2045 (in accordance with the 80 year perpetuities limit).

Issues in dispute

The issue was whether the Court's inherent jurisdiction — to allow deviations from the terms of a trust deed — enabled the Court to allow the trustee to vary the Deed and extend the vesting date.

The decision

Justice Darke found that the Court's power is exercised only in exceptional or urgent circumstances. These are circumstances involving:

"an emergency that has arisen in the course of administration of the estate which needs to be resolved in the interests of preserving the trust property." ^[2]

The trustee argued that:

• this was a situation involving an emergency because capital gains tax was introduced in 1985 and if the Trust vested, CGT would be payable on the trust property (something unexpected that the settlor would not have foreseen); and
• granting the trustee the power to vary the vesting day concerns administration of the Trust and was necessary in the interests of preserving the trust property.

However, the Court did not agree with the trustee for the following reasons:

• the settlor had been alive when CGT was introduced and had the power to vary the Deed up until their death in 1991 (but chose not to);
• CGT may not have been foreseen at settlement of the Trust in 1965, or its variation in 1974, however it was a well-known fact at a time when the settlor could have taken steps to amend or defer the vesting date;
• CGT legislation itself did not affect, or prevent performance of, the trustees' duties at the vesting date;
• the CGT would give rise to liabilities on the recipients of the property, rather than jeopardising the Trust property itself. Therefore varying the vesting date was not necessary to 'preserve' the Trust property; and
• the Court's jurisdiction to vary a trust's terms should be exercised with great caution and not result in creation of a new trust to the one the trustee is administering. In the Court's view granting relief to the trustee to amend the vesting date would create a new trust.

Accordingly, the trustee was not granted an order allowing it to alter the vesting date.

Plan ahead

While a trustee may apply to the Court to extend a vesting date, Paloto's Case illustrates that there is no guarantee the Court will allow the extension.

Therefore, it is important for those administering and managing trusts to plan for vesting dates. This planning could include:

• setting up a register of the trust deeds that you manage which lists the settlement date and planned vesting date for each trust;
• planning ahead and informing clients of potential tax liabilities and consequences on the vesting of trust property;
• seeking legal advice in respect of any legal and adverse tax consequences if a vesting date is approaching; and
• seeking legal advice in respect of the variation power in the trust's deed and to assist with the drafting of an appropriate variation.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of topics.

Order Cleardocs document packages

• Discretionary (Family) Trust
• Change of Trustee Discretionary Trust
• Trusts - corporate trustee