How to take the headache out of Trust Deed Amendments

A Trust amendment is a legal document that can change one or more aspects of a revocable living Trust, that is without revoking the entire structure of the deed. The goal of a living trust amendment is to help you make changes to beneficiaries, trustees, provisions, or modify any conditions to the Trust.

What is a trust?

A trust is an obligation imposed on a person or other entity to hold property for the benefit of beneficiaries. While in legal terms a trust is a relationship not a legal entity, trusts are treated as taxpayer entities for the purposes of tax administration.

Trusts are widely used for investment and business purposes.

In Australia, the trust fund is a key structure to make sure individuals safely pass on their assets to their chosen beneficiaries.

A trust is a great tool for segregating a person's assets from his estate or portfolio, effectively shielding those assets from creditors in bankruptcy proceedings or plaintiffs in lawsuits.

The assets in a trust may contain stocks, bonds, cash, real estate, antiques, and fine art.

The trustee is responsible for managing the trust's tax affairs, including registering the trust in the tax system, lodging trust tax returns and paying some tax liabilities.

Beneficiaries (except some minors and non-residents) include their share of the trust's net income as income in their own tax returns. There are special rules for some types of trust including family trusts, deceased estates and super funds.

What are the advantages of a Trust?

Below are the advantages of trusts, these are:

Asset Protection

The assets of a discretionary trust are separate to the assets of the beneficiaries. As a result, the trust assets may be protected from creditors in circumstances where a beneficiary is sued or made bankrupt.

It also allows the trustee to control the assets of individuals who are too young or incapacitated to handle their own financial affairs. It can also help manage and distribute pension/retirement funds during an individual's employment years.

Tax Planning

The overall tax paid by a family group may be reduced by:

• Distributing income and capital to beneficiaries on lower marginal tax rates; and
• Distributing different types of income to different beneficiaries (i.e. “streaming”).

Each beneficiary then pays tax at their marginal rate on income distributions received from the trust in each financial year.

Carry Forward Losses

A discretionary trust may carry forward losses, in certain circumstances.

Capital Gains Tax Discount

A discretionary trust is entitled to a 50% discount on any capital gains made on disposal of any assets held by the discretionary trust for greater than 12 months.

What different types of Trusts are there?

Family/Discretionary Trust

A Family Trust (also known as a Discretionary Trust), one of Australia’s most common small business structures, is ideal for families with private businesses and other income-generating operations. Such trusts give trustees the discretion to decide who receives distributions, and how often payouts occur. Accepted in every Australian state, Family Trusts are relatively easy to establish and operate.

Unit/Fixed Trust

A Unit Trust (also known as a Fixed Trust) differs from a Family Trust in that the trustee generally does not hold discretion over the distribution of assets to beneficiaries. These structure divide the trust property into units, similar to shares of stock. Each beneficiary (known as a "unit holder") owns a given number of those units, and at the end of each year, he or she receives a distribution from the trust, based on the number of units held. Ideal when multiple families are involved, Unit Trusts operate somewhat like a company.

Hybrid Trust

A Hybrid Trust bears characteristics of both Discretionary and Unit Trusts, whereby the Trustee is empowered to distribute trust income and capital among nominated beneficiaries--as with Discretionary Trusts. However the income and capital is proportionally distributed--as with Unit Trusts, based on the number of units each beneficiary holds. Hybrid Trusts are often the favored structures when there are significant investment assets involved, due to their income tax and capital gains tax benefits.

What types of roles are in a Family Trust?

Trustee

The trustee(s) (there may be more than one) of a trust may be a person or a company (the latter is known as a corporate trustee). In either case, the trustee must be legally capable of holding trust property in their own right. The trustee holds the trust property for the benefit of the beneficiaries.

Where the trust is established by deed (which in the case of a deceased estate is the will), the trustee must deal with the trust property in line with the intentions of the settlor as set out in the trust deed. They must also act in accordance with the relevant state or territory law regulating trusts, and with any other applicable law, including tax law.

Under trust law, trustees are:

• Personally liable for the debts of the trusts they administer, and
• Entitled to be indemnified out of the trust property for liabilities incurred in the proper exercise of the trustee's powers (except where a breach of trust has occurred).

Under tax law, the trustee is responsible for managing the trust's tax affairs, including registering the trust in the tax system, lodging trust tax returns and paying some tax liabilities.

The sole trustee cannot be the sole beneficiary because a trust is a legal relationship between a trustee and the beneficiary or beneficiaries.

If a sole trustee were also the sole beneficiary, then this would be an agreement that a person had with themselves. The law says that no trust can exist in these circumstances.

However, a trustee can be a beneficiary of the trust as long as there is at least one other beneficiary as well. 

Corporate vs Individual Trustee

It is a common practice to have corporate trustees for family trusts for tax benefits. This ensures the limitation of the trustees’ liability to the corporate asset.

Generally, corporate trustees are shell corporations with no, or minimal, assets. The trustee is personally liable for the trust’s liabilities. Therefore, it is common for trusts to have corporate trustees to limit the trustees’ liabilities to the assets of the corporation.

Because of this, often, this business structure is more tax effective.

Advantages of switching/implementing a corporate trustee structure include:

• They can exist indefinitely, unlike an individual trustee who will eventually die;
• You do not have to change the legal ownership of the trust’s assets when the directors or shareholders of the corporate trustee change. In contrast, you have to change the legal ownership of the trust’s assets when an individual trustee changes;
• The shareholders of the corporate trustee can effectively control the trust by appointing the directors of the corporate trustee;
• Asset protection; and
• Limited liability.

Therefore, corporate trustee can be very beneficial and allow the trust further longevity.

Beneficiaries 

A trust beneficiary can be a person, a company or the trustee of another trust.

The trustee may also be a beneficiary, but not the sole beneficiary unless there is more than one trustee.

Beneficiaries may have an entitlement to trust income or capital that is set out in the trust deed or they may acquire an entitlement because the trustee exercises a discretion to pay them income or capital.

Generally, the beneficiaries are taxed on the net income of a trust based on their share of the trust's income – regardless of when or whether the income is actually paid to them.

Appointor 

A discretionary trust need not have an appointor and the role has no defined meaning at law. If an appointor position is created under the discretionary trust it is done so under that particular discretionary trust deed (Deed) and the powers conferred on the appointor will depend on the Deed's terms.

At a minimum the Deed will confer on an appointor the power to appoint or remove the trustee. The appointor may also be granted protective powers: for instance, the trustee may need the appointor's consent to add or exclude additional classes of beneficiaries, or vary the Deed.

The appointor's role is generally seen as the most definitive role in the discretionary trust. This is because, although the trustee under the Deed is granted the discretion as to whom and in what proportion the capital and the income is distributed to beneficiaries, the appointor controls who acts as trustee and, therefore, who exercises those discretions. 

Benefits of an Appointor 

An Appointor may also be advisable for administrative ease: for instance, if the trustee becomes unable to act or insolvent, then it is a relatively simple process for the Appointor to remove that trustee and appoint another.

An Appointor also makes sense as a means of planning for future contingencies. The Trustee of a discretionary trust is given full discretionary powers up to the vesting date — usually a period of 80 years. During this time, a trustee may be administering a sizeable trust fund. The presence of an appointor may:

• Help ensure that the trustee acts in compliance with its obligations; and
• Provides a simple and effective process for replacing the trustee if the trustee falls short in meeting its obligations or becomes conflicted in meeting its duties.

Ultimately the answer may turn on the trust's objectives, and whether having an appointor will further those objectives. For instance, if the primary purpose of the trust is asset protection, then for the reasons referred to under 'Other considerations' below, it would be advisable:

• That the trust has an appointor; and
• That the appointor is a trusted family member who is not a named beneficiary.

Important Considerations to Appointor Succession

Options include:

Successor named in deed

The Deed states who will succeed the appointor on their death. It can be a particular named person, or the executor of the appointor's will (i.e., the appointor's legal personal representative).

Successor appointed by will

The Deed states that the appointor is permitted to appoint a replacement appointor under the terms of the appointor's will. That person takes over the appointor role on the appointor's death.

Joint appointor succeeded by survivor

The Deed names two (or more) appointors, and provides that on the death of one appointor the survivor(s) continue to act as appointors.

Appointor replaces themselves during the term of the Deed

The Deed permits the appointor to appoint additional or replacement appointors.

Temporary succession (i.e. due to incapacity)

The Deed provides for temporary succession during any period when the appointor is unable to act. The replacement appointor may be determined by one of the methods above.

Combination of approaches

The Deed may set out a combination of the above to deal with succession. For instance, on the death of the appointor the appointor's spouse becomes appointor, and on the death of the spouse the spouse's executor becomes appointor.

It is recommended that the appointor provisions and succession of the appointor be carefully considered before establishing a discretionary trust. Having provisions in the Deed which deal with the resignation, removal and appointment of the appointor is necessary to ensure certainty of the Deed and remove any confusion when an appointor wishes to resign, dies, lacks capacity or is bankrupt. 

Settlor

The settlor must hand over the settled sum to the trustee to be held on the terms of the trust for the benefit of the beneficiaries. The settlor does not have to reside in Australia, however they must be present when the trust deed is settled because he/she is responsible for the trust property becoming vested in the trustee.

The trustee must issue a receipt to record the settling sum exchange has occurred. This is the point at which the trust is created because, by executing the trust deed and providing the settled sum:

• The settlor has put the trustee in charge of trust property;
• The settlor has defined for the trustee which persons fall within the class of beneficiaries, as stated in the trust deed; and
• The trustee has agreed to act.

The settlor then steps out of the picture.

Why is a settlor's role limited?

There are tax implications under the Income Tax Assessment Act 1936[1] where a settlor creates a trust and:

Has the power to revoke or alter the trust to acquire a beneficial interest in the income derived by the trustee, or take back trust property; or
The income of the trust is payable to the minor children of the settlor.

In such a case, the trustee of the trust will be assessed as having to pay income tax on the income of the trust by the ATO, rather than income tax being assessed in the hands of the beneficiaries of the trust to whom distributions are made.

For this reason, it is advisable to limit the settlor's role in a trust to the initial establishment of the trust and payment of the settled sum. To avoid the perception that the settlor's declaration of trust is revocable, the settlor should be unrelated to the trustee and the beneficiaries of the trust.

What types of roles are there in a Unit Trust?

A Unit

A unit is a piece of property that entitles the unit holder to a specified proportion of the income and capital of the trust.

A unit held under a trust is different from a share in a company. A share confers on the holder no legal or equitable interest in the assets of the company; Units under the trust deed confer a proprietary interest in all the property which is subject to trust of a deed.

In other words, a unit in a unit trust confers on the unit holder an equitable interest in both the underlying capital and the income of the trust.

Trustee

Just like the discretionary trusts, there is a trustee in a unit trust, who has similar duties and responsibilities.

It is also advantageous to have a corporate trustee in a unit trust structure.

Unit Holders

Instead of beneficiaries, unit trusts have unit-holders. Unit holders,  are all predominantly un-related members of two or more separate families getting together to hold an asset together (usually a large property or shareholding) or run a business together.

All income and capital is distributed according to unit holding, rather than by the discretion of the trustee, which is why Unit Trusts are also referred to as "fixed' trusts.

The unit holders as a group control the trust. This is because the trust deed gives them the power to direct the trustee and if necessary, dismiss the trustee and appoint another person to act as the trustee instead.

The deed specifies the percentage vote required for a resolution of a meeting of unit holders to be effective. Usually it is 50% unless the unit holders decide otherwise.

How does a Trust Amendment work?

Trust Deeds are technical and complex. The first place to start is to review the trust deed to see how to amend the trust deed.  You can only amend the trust if the terms of the trust deed allow it. Consent may be required by a custodian, appointor, or other party to amend the trust deed, and if consent is not provided then the amendment cannot be made.

Can Company 123 help me with amending my trust?

We at company 123 can help you prepare a deed of variation for only $88. If you are interested to begin the process by visiting and completing our application here.

Please also provide a copy of your trust deed, as this is required during the process of amending your deed.

What type of amendments can I do with Company 123?

Within our deed amendment application: https://company123.com.au/trust-deed-amendments/register we offer various types of amendments. These include:

• Adding/Removing Beneficiaries
• Adding/Removing Appointors
• Updating Trustees
• Adding clauses
• Issuing new units (For Unit Trusts)
• Unit Trust Share Transfers
• Adding/Removing Unit Holders

For other types of variations that are not listed here, you can contact us for further information.

Tax Consequences of Trust Amendment

If you make any amendments in accordance with the proper powers and procedure under the original trust deed, there will usually be no major tax consequences.
However, if you make major amendments that results changes to the structure of the trust, the amendment will give rise to a resettlement.

What is a resettlement?

A trust resettlement occurs when a trust is varied or amended to the extent that it becomes a new trust.  This has some significant tax repercussions in regard to:

1. Capital gains tax (CGT); and
2. Duty tax.

CGT Repercussions 

When a resettlement occurs, the previous trust is taken to have been disposed by the trustee. The trustee then reacquires the new trust.

This kind of disposal triggers a CGT event, resulting in either a capital gain or loss.

Any losses that have been previously carried forward by the trust, to be offset against future income, will also cease to exist upon the trust’s disposal. This is because a different taxpayer (i.e. the old trust rather than the new trust) incurs the carry-forward losses. 

Transfer Duty Consequences

A resettlement of trusts generally should not trigger duty tax since there is no change to the parties or properties of the trust. A resettlement will generally only cause duty liabilities if the termination of the old trust causes the property to change hands. 

Whats next?

Company123 can help set up your trust quickly, easily, and professionally. In our role as tax agents and with our team of legal experts, we can provide a clear, comprehensive deed and all related documents for the fee of $149 plus GST. We provide both Family (Discretionary) Trusts and Unit (Fixed) Trusts at high standards.

We also provide deed amendment services for only $80 plus GST. Do you need to add a new clause? Has your trust recently changed appointors? Do you need to add new members or beneficiaries to your Trust? Well look no further, you can get started with Company 123 here and receive a deed of variation document developed by a team of experts.

For further information on trusts or trust amendments, you can call us on (03) 9832 0660 or alternatively send us an email at support@company123.com.au.