The Settlor is the person who "settles" a discretionary trust, by providing the settled sum to the Trustee (or Trustees).

The Settlor must also actually pay the settled sum. If they don't pay the settled sum the trust will never have existed, because for a trust to exist there must be trust property - in most cases the trust property will start out being the settled sum.

Best practice is to have a close, though unrelated, family friend as the Settlor.

We do not accept relatives of the beneficiaries or trustees as Settlors. The Settlor has to be someone that will never benefit from the trust, and the trust deed specifically excludes the Settlor from benefiting. This is primarily due to the adverse tax consequences that can otherwise arise - refer S.102 of the ITAA 1936, in particular. Also, it avoids the possibility that the Trustee may, at some stage later on, accidentally breach the trust deed by making a distribution to the Settlor.

There have also been instances were the validity of the entire trust has been questioned because it was found that the settlor (e.g., an accountant) charged for providing the settled sum, meaning it was never properly gifted to the trust, and therefore there was no trust property to allow the trust to exist.

We advise that the sum is preferably $10 or more, as it is seen to be a sufficient amount to start a trust.

Some court cases (a recent case we have seen is Cumins v FCT [2006] FCA 43) have not questioned a settled sum of $5. Nonetheless, a settled sum of at least $10 is advised.

Technically, the appointor (in our deed, and similar deeds) has the most control of the trust because they can appoint and remove the trustees who exercise the various trust powers.

Appointors will generally be assumed to be "joint appointors", unless we are otherwise instructed that one or more appointors are to be independent. Joint appointors have rights of survivorship, which take a kind of 'last man standing' approach. For example, if Husband and Wife are joint appointors and Husband dies, the Wife becomes sole appointor.

In general, due to the control issues, the appointor/s should in most cases include at least one of the people setting up the trust, e.g., one of the primary beneficiaries.

Some trusts include an "independent" appointor (usually the accountant), in addition to two joint appointors, to help make independent appointment decisions, but who will be "wiped off" the trust once both normal appointors die. This ensures that the accountant (or other independent appointor) and their spouse/children/etc don't end up with sole control of the trust.

If there are persons other than the primary beneficiaries listed as appointors, please let us know if they are to be joint appointors (i.e., with rights of survivorship), or if one or more of them is an independent appointor. For example, two appointors may be from different families (e.g., two brothers) and might not want to be joint appointors with rights of survivorship.

No, that's fine. Unusual, but fine.

What happens when an appointor passes away generally depends on the instructions of the person setting up the trust!!

However, in general:

1. If there is only one appointor, unless their will says otherwise, the powers of appointment will pass to their legal personal representatives (LPRs);
2. If there are two or more joint appointors, as each one dies, the powers of appointment will pass to the remaining joint appointors until there is only one left, and then the powers will pass to that person's LPRs;
3. If any of the appointors are considered "independent" (eg, an accountant or solicitor), then that person will never get the sole power of appointment (i.e., once there is only one family member appointor and the independent left, the powers of appointment will pass to the family member's LPRs on their death); and
4. The appointors may choose not to be joint (in the context of survivorship), meaning that on their death, their own power of appointment will pass to their own LPRs, rather than to any surviving joint appointors. Where a husband and wife are to be joint appointors, the deed is set up as per 2. above.
   
   It should also be noted that subclause 18.3 of the deed allows for additional/replacement appointors to be appointed while the appointors are still living:
   
   "Subject to the restrictions (if any) specified in item 9 of the Schedule, an Appointor shall have the power, exercisable jointly with any other Appointor, from time to time by deed or will to appoint another person to act as the Appointor either jointly with the existing Appointor or to act as sole Appointor and to provide for the method of succeeding Appointors to be appointed and if such a person or persons accept the appointment they shall exercise the powers of the Appointor in accordance with the terms of the appointment notwithstanding what is specified in the Schedule about who shall be the initial Appointor of the Trust."
   
   

Also, under subclause 18.6, "If at any time or from time to time there is no Appointor remaining or otherwise appointed, the Trustee for the time being may assume the powers of the Appointor."

Finally, an appointor may be automatically removed if they become bankrupt or mentally ill, or if the appointor "is acting in the capacity of, or on behalf of, a trustee in bankruptcy, liquidator or administrator, or the Family Court Registrar", but they can resume their position if the condition that caused the Appointor to be removed ends, is reversed or otherwise ceases.

Yes - our deed already covers this. The Appointors are required to act jointly if there is more than one. A dispute resolution mechanism is provided in case they are deadlocked and cannot reach agreement.

If you want additional restrictions on the Appointors, we can add them to the Schedule.

The reason this might be dangerous is if the powers of the appointor are considered "property". If they are, then a trustee in bankruptcy, for example, could then possibly acquire, and then use, those powers to appoint a trustee that would make distributions to creditors, etc. Unfortunately, whether or not a trustee in bankruptcy could do this is still unclear.

However, even if they could do this (and it is unsure whether they could), an appointor is still expected to exercise their powers in accordance with their fiduciary duties (i.e., in the interests of all the beneficiaries).

At the end of the day, this is a technical legal issue that would require specific legal advice. Nonetheless, under our current deed, "the office of an Appointor will be vacated if that Appointor:

(a) becomes bankrupt or otherwise seeks relief under the laws pertaining to bankruptcy; or

(b) that Appointor is acting in the capacity of, or on behalf of, a trustee in bankruptcy, liquidator or administrator, or the Family Court Registrar"

This is designed to make the trust safer in case an appointor does get sued.

Also, having an independent appointor (such as a trusted family accountant or solicitor) can make the trust safer, too, since the deed requires that the decisions regarding appointment be made jointly (i.e., unanimously).

There are no limitations in our deed regarding whether the trustee can be a beneficiary.

In fact, the deed specifically states that the trustee can benefit from the trust and exercise powers in its own favour. However, the settlor is specifically excluded.

Some people are of the view that allowing the trustee to be a beneficiary may invalidate the trust - or at least that any distributions by the trustee to itself may be difficult to justify in light of their fiduciary duties.

Of course, we are reliant on the courts in establishing what trusts can and can't do. In a recent case in the Victorian Supreme Court (Ailseen Pty Ltd v One Hawker Holdings Pty Ltd & Anor [2006] VSC 135), not only was the trustee also a beneficiary of the trust, but the settlor didn't provide the settled sum and his signature was forged and the trust was still valid!

That said, we do not advise this course of action.

Where there is a broad class of beneficiaries, as there is with a discretionary trust, there should be no problem with the individual trustees also being the primary beneficiaries. For a trust to exist, there needs to be a separation of legal and beneficial interests between the trustees and beneficiaries, and if two trustees hold the trust property on trust for a broad range of beneficiaries (which may include the trustees themselves), this should satisfy the requirement of separating legal and beneficial ownership.

Note that this result should not change whether there are two individual trustees, a sole individual trustee, or, indeed, a company where the directors and shareholders are also primary beneficiaries.

Specifying the primary beneficiaries in the deed is simply a means of establishing who is included in the entire class of beneficiaries (as the General Beneficiaries are determined in part by reference to the Primary Beneficiaries), although the primary beneficiaries can also be default beneficiaries in certain circumstances.

It is important to remember, therefore, that, in a discretionary trust, the potential beneficiaries (also known as "objects" of the trust), may include hundreds of individuals, companies, and trusts associated with the primary beneficiaries and each other (as well as charities), and it is for these potential beneficiaries that the trustees hold the property on trust (i.e., not just for the primary beneficiaries alone).

There is an argument that allowing a trustee to be a beneficiary may invalidate a trust, but that argument is not supported by the case law as it currently stands (and would probably invalidate a lot of trusts in Australia!) However, we have heard that this may be a problem overseas. To be extra careful, therefore, some people prefer to have a totally independent trustee "just in case".

Note that some say that the same argument could apply where a corporate trustee's directors and shareholders are also primary beneficiaries, i.e., this could invalidate the trust, although the corporate trustee in such a case, being a separate legal entity, is probably one step removed, and there are other benefits to having a corporate trustee (such as personal asset protection), although the costs of having a corporate trustee are higher. Also, a trustee who is also a beneficiary would need to be careful to ensure that he or she does not breach any of their fiduciary duties in relation to the trust and the beneficiaries. For example, the trustee has a duty to act honestly and in good faith, and should also consider all of the potential beneficiaries (or "objects") of the trust before making a distribution in a particular year, irrespective of whether he or she is also a beneficiary. In addition (this is taken from the NTAA's recent "Trusts" seminar notes):

"Unless the trust deed specifically allows it, (the trustee) cannot exercise his powers in his own favour. For example, he could not borrow money in his own capacity from the trust interest free and without security unless the trust specifically allowed it. Similarly, if (the trustee) was also a beneficiary he must take care when exercising his discretion to distribute income to himself. An improper exercise of that discretion to advance his own interests will constitute a breach of trust."

We see no problem with having the sole director of the corporate trustee of a discretionary trust being able to benefit from the trust.

Since the corporate trustee is a separate legal person, and the class of beneficiaries of a discretionary trust is very broad, there is no issue of the legal and beneficial interests in the trust property merging - i.e., the legal owner is the company, and the beneficial owners are effectively all of the discretionary objects in the deed. We have never heard that "control" of a trustee by a single beneficiary (in a class of many beneficiaries) could invalidate a trust - in fact, many discretionary trusts would be controlled by a single individual, whether as a director of the corporate trustee or as an individual trustee. It is highly unlikely that it could be said that a trust was never formed simply because the director of the corporate trustee makes a decision in a particular year, by resolution of the trustee, to make a distribution to himself as a discretionary object of the trust.

It's "allowed", but it means that the trust will be a "non-resident trust" for tax purposes (and this can lead to bad, or at least inconvenient, tax consequences).

Generally when we tell people this, they then change the trustee.

Refer to the following pages on the Tax Office's website for more information:

Residency requirements for trusts:
http://www.ato.gov.au/businesses/content.asp?doc=/content/33498.htm&page=3&H3

International tax essentials for businesses:
http://www.ato.gov.au/large/pathway.asp?pc=001/009/041

Attributed foreign income (e.g., under the FIF, CFC/CFT, or transferor trust measures):
http://www.ato.gov.au/large/content.asp?doc=/content/64063.htm

Taxation of distributions to non-resident trustees:
http://www.ato.gov.au/taxprofessionals/content.asp?doc=/content/74978.htm

The only restrictions on who can be a witness to sign a trust deed are that the witness is not under a legal disability - e.g., being under 18 years of age would prevent the person being a witness.

However, each State and Territory has different rules about when deeds will be validly executed. Some of these include the requirement that the deed be witnessed by an independent person. Therefore, it may be worthwhile having a person unrelated to the trust arrangement witness the signature.

Yes. The reason for this is often because the person with control over the trust is overseas (e.g., Italy), but they want the trust to be resident in Austraia, meaning they need an Australian trustee.

The more important thing is that a beneficiary is represented as an appointor (though even this may not be crucial), because the appointor(s) can remove the trustee and appoint a new one if they like. This effectively means the appointor has overall control of the trust at the end of the day.

Yes. The definition of "spouse" in the deed includes any spouse "from time to time", and the "further issue" of any of the relevant beneficiaries are also included as beneficiaries. In addition, most companies in which any relevant beneficiaries hold shares, and trusts in which any relevant beneficiaries have an interest or potential entitlement, whether or not the trust existed at the time the trust was set up, are also included as beneficiaries.

It is possible, and we can include this in the deed if you like (for an additional fee), although you had better hope you don't get back together!

It's also important to note that, although a person may be included as a "beneficiary" of a discretionary trust, they cannot actually benefit from the trust unless the trustee actively exercises its discretion to make a distribution to that beneficiary. Until such a point, all "beneficiaries" are more appropriately called "potential beneficiaries", or mere "objects", of the trust.

However, since it can be difficult to add beneficiaries to a trust after it has been set up, it is generally better to have the class of potential beneficiaries as broad as possible. Therefore, it shouldn't be a problem if an ex-spouse is included in the class of general beneficiaries unless there is a chance that he or she could become a trustee or appointor of the trust.

The trustee of a discretionary trust generally has complete discretion each income year when determining which of the objects of the trust (commonly called the "beneficiaries") will benefit from the income of the trust. The Beneficiaries clause of our trust deed is very broad, and includes most if not all members of a family, including great, great, great, great greandchildren (and even further) as well as companies and trusts the beneficiaries are involved with and various charities, to mention a few. Therefore, in one year, the trustee could resolve that each of the children under 18 receive $1,666, Dad receive $20,000, and Mum the remainder. The following year, Dad could receive $50,000, an uncle $10,000, and a related company receive the remainder. The next year, all Dad's living relatives could receive, say, 5% of the trust's income. Provided the trustee meets its duties under the trust arrangement, the distributions are entirely up to him/her/them/it.

Please note that distributions are generally relevant for tax purposes (i.e., they determine who pays tax on the income), and that they do not necessarily depend on cash moving between the relevant parties.

The trustee also generally has equal discretion regarding distributions of capital, whether during the life of the trust or when the trust eventually vests (i.e., when it effectively "winds up" and comes to an end).

Please note that trusts and trust law can be quite complex, and there are many more issues involved than those set out above. In addition, how the trust can be run can very much depend upon the terms of the individual trust deed. Therefore, we recommend that you obtain professional independent advice before ordering and operating a discretionary trust.

Yes.

Yes. The deed specifically provides a number of ways that the trustee can apply distributions on behalf of a beneficiary, including by "paying the income or capital to a parent or guardian of the Beneficiary or any other person where the income or capital will be applied for the benefit of the Beneficiary if that Beneficiary is a minor or is otherwise under a legal disability".

The trust is subject to the laws of the Governing State (or Territory). This helps locate the trust in a specific jurisdiction, if the trust or any parties with an interest in the trust ever needs to seek the assistance of a court to enforce their rights.

Also, the Governing State is generally the State or Territory that will have the right to stamp and impose stamp duty on the settlement of the trust deed.

We do not advise on stamp duty, but most State and Territory stamp duty legislation impose duty on a trust deed when it is first executed in that State/Territory.

For a trust to be subject to Queensland law (and to be exempt from stamp duty according to Queensland law) the trust deed effectively needs to be executed (signed) in Queensland. It doesn't matter that the trustee will later acquire property in Queensland - what is important is the situation at the time the trust is set up.

For example, if the parties to a trust were in either WA or NSW, it would be appropriate to look at the stamp duty laws of both of these states.

Therefore, if the first person signing the trust deed does so in NSW, the deed will be liable to stamp duty in NSW. If the the first person signing the trust deed does so in WA, the deed will be liable to stamp duty in WA. Otherwise, if it is executed in Queensland, it will be subject to Queensland law, and exempt from stamp duty under Queensland law. Refer S.58(1) of the Duties Act 1997 (NSW), and S.16 and S.17A of the WA Stamp Act 1921.

Yes, the trustee would be able to change the governing state later (along with other terms of the trust), but this would need to be done by means of a Deed of Variation, varying the trust deed. You would need to get advice at that time, to ensure that such a change did not resettle the trust.

Yes - the trust effectively has a maximum life of 80 years. This is because most States and Territories require trusts to vest (or wind up) after a maximum of 80 years. This is called the rule against perpetuities, and basically exists so that a person cannot tie up assets forever in a trust.

The rule against perpetuities was abrogated in South Australia a number of years ago (and even in that State any beneficiary can apply to have the trust wound up after 80 years), but every other State has retained the rule.

Therefore, our deed does require the trust to vest within or at the end of 80 years (the trustee has discretion to vest it earlier than 80 years).

The trustee is not prevented from using trust assets for paying debts incurred as trustee - in fact, the exact opposite is provided for. That is, the trustee is explicitly authorised to use the trust assets to pay the debts of the trust (to be honest, I'm not sure how a trustee could adequately perform its duties if it was prevented from using trust assets in such a way). Of course, the trustee cannot use the trust assets to pay personal debts - to do so would breach the trustee's fiduciary obligations.

We don't provide stamp duty advice, and unfortunately we are unable to alter our deeds to take into account the various stamp duty regimes in each of the States/Territories. However, the following is an example of the information available regarding the family farm exemption in Victoria (from the State Revenue Office's website), regarding which trusts will qualify for an exemption. Looking at this information, it would appear that our trust deed would not meet these requirements, and a deed may need to be specifically drawn up by a solicitor:

What type of trusts qualify?

The transferee may be a trustee of a fixed trust which limits the beneficiaries to relatives of the transferor or charitable institutions. Alternatively, the transferee may be a trustee of a discretionary trust which only allows capital distributions of the primary production land (including any part of the primary production land) to be made to a relative of the transferor or a charitable institution.

The trust deed cannot contain a variation clause that would permit the distribution of the family farm (or any part of it) to parties other than relatives or charitable institutions."

The wording does periodically change, but that does not matter. You must be very careful that by taking this course of action you are not inadvertently backdating the trust. It is, of course, illegal to backdate such documents, and backdating is not effective in any case.

This is because a trust comes into existence when there is (a) a trustee, (b) beneficiaries, and (c) trust property, whether or not there was a signed trust deed as at that date. Simply backdating a document does not satisfy these requirements if it cannot be proven that they were in existence as at the correct date.

We do not date deeds (the clients fill in the date on the date of execution), but we also only provide our most current deeds - i.e., we do not provide our earlier deeds.

If you want anything other than our most current deed, you should seek legal advice from a solicitor who can tailor a deed to your specific circumstances, taking into account the above considerations.

We stopped providing restricted discretionary trusts from the 1st October 2004.

This product was designed to get around some of the problems with discretionary trusts being able to access the small business CGT concessions (due to an anomaly in the tax legislation which meant they were not ever able to satisfy the $5 million maximum net asset value test). Basically, it restricted the distributions that could be made to any one beneficiary of the trust to less than 40% of the income and capital of the trust (so that the assets of every single potential beneficiary were not considered assets of the trust for the purposes of the maximum net asset value test).

However, an amendment was made in 2004 to the control test in Division 152 of the ITAA 1997 (refer Tax Laws Amendment (2004 Measures No.1) Act 2004), removing this anomaly and making it easier for discretionary trusts to satisfy the small business CGT concession requirements without needing to have this restriction in the deed (the control test for discretionary trusts now generally looks at actual distributions, rather than potential distributions). This effectively eliminated the need to have a restricted discretionary trust.

These types of trusts involve both fixed elements like a unit trust (and may even issue units), but also give the trustee an element of discretion in relation to the distribution of income and/or capital.

Although these types of trusts have their uses, they are often quite specific to the needs of the relevant individuals setting them up, and we do not provide them.

Also, we have found that the "tax benefits" of hybrid trusts are difficult if not impossible to achieve. Refer to the seminar notes on this topic at http://www.ntaa.com.au/media/associationatwork/Usinghybridtrusts.html

The winding up of the trust itself is fairly straight forward, but the distribution of assets, etc, prior to the wind up can sometimes make things more complicated.

We do not do this, but we can refer you on to a legal firm that we work closely with. We will need your name, member number, and contact details.

If we have recently set the trust up for you, and you have discovered that you want something changed in the deed and it has not yet been executed, we can generally make the change and reprint the documents for you for $50. This is because the trust has not yet come into existence, and so we can just reprint the relevant parts (or the whole deed) and resend it out.

However, once the trust deed is executed, the trust exists, and so any change will need to be done by our lawyers as a separate deed of amendment, specific to your circumstances (generally for $350).

The incorrect spelling of a party's name on the trust documentation will not necessarily make the trust arrangement invalid, provided the parties can still be identified. However, we understand that some clients may not like the look of their names being spelled incorrectly.

Theoretically, the parties to the deed can write the relevant corrections directly on to the deed, and sign or initial to indicate that they all agree to these changes. However, some institutions (e.g. banks) may have an issue with this.

Alternatively, we can rectify the spelling and reprint the deeds for you for a small fee ($50), if you provide us with instructions from the parties with the correct details (on the understanding that, by re-printing the deeds, the printed version of the deed represents the trust deed as the parties understood it to be).

However, if the trust has already commenced (i.e., the deeds are executed and stamped (if appropriate), and the trust has started interacting with the outside world), then we would need to prepare a deed of variation to the existing deed ($350).

In general, only lawyers are able to draw up legal documents (and do other "legal" work) for a fee, under the Legal Practice Acts of the various States and Territories. Therefore, only a lawyer can be paid to prepare such documents.

However, a person is entitled to draw up their own documents for their own use, but it is important to ensure that, when non-lawyers draft legal documents, the documents are still legally effective.

The fact that a legal document is not drafted by a lawyer does not make it "illegal" as such, although a non-lawyer who does so, for a fee, can be subject to prosecution (for example, S.21 of the Legal Practitioners Act 1981 (SA) states that a person who does something that only a lawyer should do, for a fee, can be fined $10,000).

Changing the trustee normally requires a deed of variation. To do this, we need to see the existing trust deed, establish how a variation of the deed can be accomplished, and then, usually, prepare the deed of variation, often to be signed by the trustee (sometimes the appointor (or equivalent) also needs to consent in writing - we provide this, too). The deed of variation needs to be prepared on the basis of the client's deed - we cannot really use a "pro-forma" deed.

We provide our deed of variation service for $350. We do not issue a new deed - you will basically attach the deed of variation that we issue to your existing trust deed.

In essence, yes, although the case was specific to its own facts and the specific parts of the Corporations Act 2001 that ASIC was relying on. However, the case has created a lot of concern.

The case, Richstar, was a Federal Court decision in Western Australia (regarding the ongoing saga of the Westpoint collapse). The court held that where:

• a defendant in the action was a beneficiary of a discretionary trust; and
• that beneficiary was the effective controller of the trust;
• then it was arguable that ASIC was able to appoint receivers over the assets of that discretionary trust

This is a substantial change from the accepted application of trust and property law. In fact, the judge acknowledged that, in the ordinary case, a beneficiary does not have an interest, not even a contingent interest, in the assets of the trust. However, he went on to hold that:

" where a discretionary trust is controlled by a trustee who is in truth the alter ego of a beneficiary, then at the very least a contingent interest may be identified because 'it is as good as certain' that the beneficiary will receive the benefits of distributions either of income or capital or both."

Examples where the beneficiary was an 'effective controller' included where:

• the beneficiary was the director and secretary of the trustee company, and the original appointor (with his wife being the current appointor);
• the beneficiary was current trustee and the current appointor was his wife; and
• the beneficiary was the appointor.

Although this is a concerning development, it should be remembered that this is a decision of a single judge in an interlocutory matter (the decision freezes the assets until the substantive issues, such as whether the beneficiaries truly own the assets in question, have been determined). Also, the decision relates to the broad definition of 'property' in the Corporations Act 2001, which is very different from, for example, the definition of divisible 'property' in the Bankruptcy Act 1966.

Nonetheless, it would be worthwhile to seriously consider which of the beneficiaries, if any, should also be trustees and/or appointors of the trust.