You may want to or have already set up a trust to operate your business or manage your family’s assets. While trusts offer flexibility and carry tax planning benefits, there may come a stage where you want to make changes to the people or entities controlling your trust. This article sets out what you should consider and the steps to take to change the trustee of a trust.
What is a Trust?
A trust is a legal relationship whereby a person or a company (the trustee) holds an asset for another’s benefit (the beneficiary). In most Australian states, the trustee must distribute the trust’s assets within 80 years of the commencement of the trust or when beneficiaries consent to closing the trust. However, before either of these occur, the appointor or first named beneficiary has the right to replace the trustee.
The trustee controls the distribution of the trust income and assets to the beneficiaries. Additionally, a trustee should:
- be familiar with the trust’s terms;
- keep accounts and records relating to the trust;
- act honestly, reasonably and in good faith; and
- avoid all conflicts of interest.
A trustee’s failure to fulfil their duties may inform your decision to change trustees. Additionally, depending on the severity of the breach, a trustee may be personally liable.
The Process of Changing a Trustee
The process of changing trustees varies depending on whether you have an individual or corporate trustee. The trust deed determines the process of changing the trustee of your trust.
A well-drafted trust deed would address the appointment and removal of a trustee by setting out procedures for the resignation of the trustee. However, depending on how the trust deed is set out, you may not necessarily need to amend the existing deed to change the trustee.
The new trustee will need to sign a Consent to Act declaration as the trustee of the trust. This simply means the trustee consents to the appointment and promises to act as the trustee of the trust.
Importantly, it is the existing trustee who holds the legal title to trust assets. Therefore, after changing a trustee, you should execute and lodge the relevant documents to transfer the assets to the new trustee.
You will have a corporate trustee when a company acts as the trustee.
Changing a corporate trustee may be a simple process if what you are ultimately trying to change is the person controlling the trust. A trust with a corporate trustee is essentially controlled by the directors acting on behalf of the company. Therefore, changing the person controlling the trust will only involve the removal and subsequent appointment of a director as opposed to changing the actual trustee.
In contrast, replacing the whole company as trustee involves going through the same process as replacing an individual trustee.
Resettlement of Trusts
When changing a trustee, you should comply with the procedures and requirements set out in the trust deed. This is to avoid making a change outside the trust’s scope of amendment power, which can otherwise resettle the trust.
A trust becomes resettled when an amendment is so significant as to fundamentally change the trust. If, based on the current deed, changing the trustee is considered significant enough to affect the foundation of the trust, the trust becomes resettled. Consequently, the previous trust has ceased and a new trust has formed. Overall, resettlement is important as it may impact your Capital Gains Tax and state duty obligations.
To change the trustee of your trust, you should first refer to the current trust deed to see whether it permits changing the trustee. The correct procedures must then be followed to ensure the change is valid and does not resettle the trust.
Successfully changing the trustee of your trust depends on whether you have an individual or corporate trustee. With corporate trustees, you should determine whether you intend to replace the actual company acting or just directors controlling the trust. To learn more about the tax benefits and consequences of amending trusts, contact LegalVision’s tax lawyers on 1300 544 755 or fill out the form on this page.
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