Take care to make sure your family trust update is effective

Not all Trust Update Services are equal (or in some cases, even necessary…)

We have been somewhat perplexed by the number of people we have seen offering a “Trust Review & Update” service over the past year or so. To be honest, we have also been surprised at the low cost they have been offering this service.

The reasons for our surprise include:

  • The fact that the implications of the Bamford Case have to a large degree been overstated – because most modern Trust Deeds already allowed the necessary flexibility with regard to the definition of “Trust Income”, preservation of the attributes of Trust Income, and the flexibility to identify items as either “capital” or “income” in nature (within reasonable limits);
  • The real sting in the tail was always the developing approach by the Tax Office with regard to Unpaid Present Entitlements. This area was always going to necessitate real substantive amendments to Trust Deeds. People paying for amendments to accommodate Bamford were always going to have to come back and pay again for amendments dealing with UPEs; and
  • Perhaps the area needing most attention is the inter-generational wealth transfer beginning to take place – and the glaring need to update Trust Deeds to put in place the mechanisms to allow control of trusts to be dealt with adequately in the Estate Planning and Business Succession context. Little mention has been made of this in any quarter. In the medium term, yet another review and amendment is going to be required.

So we have been sitting on the sidelines. Until now.

The approach adopted to UPEs by the Tax Office in Practice Statement PSLA 2010/04 is, put simply, amazing. I could wax lyrical about how fundamentally flawed most of the reasoning is. I also believe that real reform must – and will eventually come in this area. This is because the Tax Office has had to bend reality so much to achieve its relatively simply policy objective, that the Government will be left with no choice but to react.

That said, the Tax Office does not release a document like PSLA 2010/04 in a vacuum. Treasury has obviously given its imprimatur to this approach – and I believe we will be left with its implications for some years to come – whether as a Practice Statement or legislation.

Accordingly, appropriate amendments to Trust Deeds to imbed this folly are unavoidable.

On first reflection, some modern Trust Deeds would appear to accommodate what is necessary to comply with PSLA 2010/04, i.e. the “sub-trust” concept. However, on further reflection, it is our view that amendment is likely to be necessary in all cases. This is because trust law alone does not accommodate the fantasy upon which PSLA 2010/04 is built. We are going to have to embed some of this fantasy in the Trust Deed itself. For example, PSLA 2010/04 contemplates a “loan” type arrangement between the “main trust” and the “sub-trust”. In our view a “loan” is not legally possible without specific provisioning in the Deed. This is because it would require a “single-party” implied contract – something the law does not easily recognise. This list could go on. But the implications are clear.

We are offering a fixed-price Trust Review & Update Service to accommodate all three issues: Bamford, UPEs and Estate Planning.

If you require any further information about how to update your trust deeds, contact Andrew now on 1300 654 590.

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Social media and family law

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