Are you using a Family Trust as part of your estate planning? If so, chances are you’re doing it (or have been advised to) as an asset protection vehicle in the event of a challenge to your Will or possibly to protect a beneficiary from bankruptcy, incapacity or impending creditors.

Your original trust deed is a vital document in this process, providing clear and strong guidance for the trustees. As a result, it needs to be kept securely for reference as and when required. Unfortunately, losing original trust deeds is more common than you might imagine.

Simple deed? Big problem. 

The loss of the original trust deed has the potential to be a serious problem and should be taken seriously. One of the key reasons is a Family Trust does not form part of your Estate. Whilst the trust will continue to operate, administering it will be challenging in the absence of any trust deed to rely on for guidance. This can be particularly crucial when it comes to transferring the trust’s control to your intended beneficiaries. Third parties who have dealings with the trust could take action. The actions of the trustees could also be challenged by a potential beneficiary on the basis they will have little evidence to justify their decisions without the original trust deed.

Just ignore the problem?

For trusts with a small number of assets or passive investments, it may be possible to administer the trust in accordance with the relevant law and continue as is. This is certainly the simplest and least expensive course. But this is a short-term fix and can lead to difficulties if the trustee runs into problems or there are disputes between the trustees or beneficiaries. 

Legislation does provide a set of duties and powers for trustees which form a guide to the provisions of individual trust deeds, such as duties to act fairly between income and capital beneficiaries and avoid conflicts and powers to sell trust property. This legislation can be useful for trustees where the trust deed has been lost, by acting as a default position. However, its effectiveness is heavily reliant on the nature of the trust. Trusts which require everyday ‘running’, such as those carrying on a business, will have their own very specific set of provisions in the lost trust deed and relying on generic trust laws is likely to be insufficient.

Finding the trust deed

First and foremost, exhaust every avenue to trace the trust deed as the best solution – by a considerable margin – is to find it. Possible search options are:

  • Contacting current or former trustees, directors of corporate trustees and beneficiaries
  • Contacting the beneficiaries
  • Contacting the settlor
  • contacting any person who may have accessed a copy of the trust deed (e.g. accountants, auditors, solicitors or financial advisors, the provider of the trust deed)
  • Checking with those who may have needed to sight a copy of the deed, such as banks and titles registries
  • Checking any place where the deed or related documents have been stored.

It’s worth remembering that even if these searches prove futile, it will still be useful for the trustee to undertake them and document the searches. This evidence may need to be tendered should the trustee be the subject of any legal proceedings in relation to the trust.

Turn to the court 

You’ve tried, but still can’t find the original trust deed. Asking a court to endorse the trust or obtain directions is now the safest and most reliable solution. It will provide clarity for all parties involved, as well as an order which can be relied upon by the trustee in the future. Of course, it will also be the most expensive method, in all likelihood amounting to many thousands of dollars.

Is a copy of the trust deed okay? 

A copy of a trust deed will generally serve as a sufficient substitute if the court ratifies it and orders the copy shall stand in place of the terms of the original trust deed. But if the copy is unsigned or unexecuted, the adequacy if this document will depend on the evidence which can be compiled to support the claim that the copy reflects the terms of the trust and any other surrounding circumstances.[1]

Clear and convincing evidence of both the existence and the contents of the original deed will be required for anyone claiming that an original executed deed exists. This evidence must be provided from the trustee of the original trust deed, the principal beneficiaries and the settlor (if still alive). These people need to prove, among other things:

  • The trust has been appropriately established
  • The terms of the lost trust deed
  • The assets in the trust
  • All things necessary in an attempt to find the lost trust deed.

Implementing a deed of variation 

A 2004 decision[2] in the New South Wales Supreme Court may provide some hope. In that case, a superannuation fund had to be varied for the beneficiaries to receive the deceased member’s benefits. This required the approval of the “principal employer” who refused to grant it. The beneficiaries applied to the Court to vary the trust deed.

The Court recognised that, where the beneficiaries are all adults and of sound mind and agree to a variation of the trust deed, this variation can be validly executed without the need for court intervention. An approach relying on the principles of this case would involve executing a deed of variation including as many beneficiaries as practical, and putting in place a new set of governing rules.

There are still some practical difficulties with doing so, such as where the beneficiaries of a trust may be numerous and include children and unborn or future beneficiaries. If the trust deed has been lost, there may also be no way to confirm the identity of the beneficiaries. The biggest difficulty will be if beneficiaries disagree on the terms of the original deed. Without sufficient evidence to prove the terms, it is unlikely the deed of variation could be executed in these circumstances 

Confirmation or Restatement? 

Another option where a copy of the trust deed can be found (especially a copy of the executed trust deed) is to execute a Deed of Restatement or Deed of Confirmation, which effectively restates or ratifies that the terms of the deed reflect the terms in the copy.

Third parties – Dealing with them 

If the administration of the trust is straight-forward and the beneficiaries and trustees have a good relationship, trustee-beneficiary dealings should continue largely unaffected. However this is not the case when dealing with third parties. Having no authoritative evidence of the identity of the beneficiaries may not satisfy authorities interested in the trust, such as the Titles Office or the Australian Taxation Office. Deeds of Variation or Deeds of Confirmation or Restatement may not satisfy the Commissioner of Taxation.[3] In this case, the trust would likely be taxed on the basis of their actual activities rather than the rights and obligations under the new or confirmed terms of the trust.[4]

Trustees should also be concerned about the lack of protection afforded them given they cannot be certain they were at all times acting in accordance with the original trust deed.

Letting go of  the trust and rolling over the assets 

For a Self-Managed Super Fund (SMSF) it may be possible to terminate the SMSF and roll over the benefits into a new one. Sounds simple, right? Well, not exactly. It’s highly likely the trustee of the new SMSF will be a related party (such as a member of the fund or a relative or business partner of a member) of the trustee of the old SMSF. If this is the case, the new trustee is prohibited from acquiring most of the assets from the old trustee.[5] There is an exemption in the case of the merger of superannuation funds, and it may be that the transaction can be effected in a way which allows the exemption to apply.

With all of this in mind, rolling over the benefits into a new fund is most effective for small funds which own little or no assets. Transferring large assets into a new fund may incur significant duty and liability for Capital Gains Tax (CGT). CGT must also be considered by family trusts attempting to roll over the assets into a new trust. For tax purposes, the trust will be treated as having sold the assets of the trust to the new trust for market value. However, trustees of trusts with only cash assets need not be overly concerned.

Challenges with open groups or beneficiaries 

The class of beneficiaries of a trust is considered ‘open’ when it is not possible to ascertain all beneficiaries by reference to a fixed list or clear class of beneficiaries which a person can be said to either satisfy or not satisfy the stated criteria. This is commonly the case with family trusts, as future beneficiaries might be unborn children.

Solutions to a lost trust deed which involve terminating, varying or confirming the original trust may be unavailable where the class of beneficiaries is ‘open’ because it’s uncertain who all the potential beneficiaries are. Therefore, the new terms of the trust may not mirror the terms of the original trust deed. If the original trust deed then suddenly turns up, there could be a messy situation and some unhappy beneficiaries.

The above solutions come with little or no guarantee of success. The clear message when it comes to original trust deeds is prevention is better than cure. Much better. A trustee needs to keep the original stamped deed under lock and key and take many copies.

Something no accountant enjoys hearing:

“I always thought my accountant kept the original copy – but they said they don’t have it!”

 

If you would like to find out more about Family Trusts, contact Fred Scali here.

[1] Ron Jorgenson, ‘A Matter of Trusts’, Taxation in Australia, Volume 42 No. 1 July 2007, pg 43.

[2] Re Bowmil Nominees Pty Ltd [2004] NSWSC 161.

[3] Davis v FCT (2000) 171 ALR 654.

[4] Ron Jorgenson, ‘A Matter of Trusts’, Taxation in Australia, Volume 42 No. 1 July 2007, pg 44.

[5] Superannuation Industry (Supervision) Act 1993 s 66.

 

DISCLAIMER: The above is a guide only and is not to be relied on as advice. Should you wish to discuss the contents of the above in relation to Estate or Succession Planning feel free to contact Fred Scali on 2 9232 5111