In Short
- Closing a family trust involves distributing assets to beneficiaries and finalising tax obligations.
- The trustee needs to ensure all outstanding liabilities and expenses are settled before termination.
- Proper documentation and adherence to the trust deed are crucial for a lawful and smooth winding up process.
Tips for Businesses
When closing a family trust, consult with legal and financial experts to ensure compliance with the trust deed and relevant laws. Accurately distribute assets and resolve liabilities, keeping thorough records of all transactions. Address any tax implications promptly to avoid issues during the closure process.
Discretionary trusts are commonly used for family asset protection and tax planning. This is why they are commonly referred to as family trusts. A trust is a legal arrangement where a person or a company (the trustee) holds assets and property on behalf of others (the beneficiaries). Each year, the trustee has discretion as to which beneficiaries are to receive any income from the trust and the proportion of the income they should get. There are many reasons for setting up a family trust, but not limited to, the following:
- to separate the beneficial owner of the asset (the beneficiary) and the legal owner of the asset (the trustee);
- for the further protection of assets in the event of a claim made against the beneficiary;
- for family tax planning purposes; and
- to use an entity to hold assets, invest and trade rather than holding those assets in an individual capacity.
Eventually, you may need to close a family trust. This could be because:
- the trust is expiring;
- you no longer want or need the trust to be in place;
- the purpose of the trust has been completed;
- the beneficiaries are at an age where they can take control of their own assets; or
- a Court orders the trust to be closed.
This article explains the process you should take when closing your family trust.
Closing a Family Trust on Its Vesting Date
All trusts will have a ‘vesting date’ set out in the trust deed, which is essentially its date of expiration. It is on this date when the trustee must take steps to formally wind up and dissolve the trust. The vesting date is often 80 years from the establishment of the trust, but this time period may vary between the laws in different Australian states and territories. This is because, in all Australian states and territories other than South Australia, the maximum life of a trust is 80 years. However, the trust deed is able to set out a shorter term and the vesting date can be based on a specific event happening, e.g. someone dying or someone reaching a certain age.
Upon the trust’s vesting date, the trustee will need to distribute the trust property and wind up the trust according to the trust deed. When this occurs, the beneficiaries become entitled to the entirety of the trusts assets and income which the trustee must distribute to the beneficiaries in accordance with the rules set out in the trust deed.
To close the trust, the trustee must, following the procedure set out in the trust:
- determine all the assets of the trust;
- determine how to deal with each asset (for example, transferring an asset to a beneficiary or selling it and distributing the net proceeds to beneficiaries);
- discharge all the liabilities of the trust, including tax liabilities;
- prepare trust accounts;
- ensure that the accounts are independently verified; and
- record all of the decisions carried out by the trustee and make them available to the beneficiaries.
Closing a Family Trust Early
It is also possible to close your family trust prior to the trust’s vesting date. You can complete this either by the:
- consent of the beneficiaries; or
- settlor or trustee revoking the trust.
Consent of Beneficiaries
To dissolve a trust in this way, the beneficiaries must:
- be 18 or above;
- agree to terminate the trust; and
- have the capacity to agree to dissolve the trust.
Upon agreeing to dissolve the trust, the beneficiaries will formally discharge the trustee and direct all the trust property to themselves. You will then need to record the trust as terminated.
Settlor or Trustee Revoking the Trust
The settlor or the trustee can close a family trust by revoking it if the trust deed gives them the power to do so. The trust deed will set out the process for the settlor or trustee to revoke the trust. You will need to formally record the revocation of the trust, and make the records available to the beneficiaries.
The Importance of Validly Closing a Trust
It is important to ensure that the family trust has been closed properly in accordance with the steps set out in the trust deed. If you miss the vesting date of the trust deed, it can have significant tax consequences as a result. Issues may also arise when the closing of the trust results in new liabilities, including tax liabilities. If the trust has insufficient funds to pay the new liabilities, the trustee may be held personally liable for these debts of the trust. We recommend that you speak with one of our lawyers at LegalVision to assist you with the process of closing a trust validly.
Key Considerations When Closing a Family Trust
To determine how to close your family trust, you will need to consider:
- the reasons why you are wanting to close your family trust (for example, if you no longer need or if the purpose of the trust has been fulfilled);
- what powers are available in your trust deed to close the trust; and
- the methods and requirements set out in your trust deed for closing the trust.
There are also important financial and legal considerations which you will need to attend to as part of closing the trust to validly close the trust. These considerations will form part of the planning and paperwork involved in closing the trust. These considerations include:
- the trustee ensuring that the trust accounts are up-to-date and correct;
- discharging all of the trust’s liabilities prior to closing the trust, including any tax liabilities;
- verifying trust accounts if required. For example, by obtaining an independent audit of the trust accounts to ensure they are correct and complete; and
- ensuring that all decisions regarding the closing of the family trust and the distribution of the trust assets are formally recorded and are made available to the beneficiaries.
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Key Takeaways
In conclusion, discretionary trusts, or family trusts, are instrumental for asset protection and tax planning but may need closure upon certain conditions. Whether the trust is expiring, no longer needed, or its purpose completed, trustees must adhere to the vesting date instructions in the trust deed and distribute assets accordingly. Early closure is possible with the beneficiaries’ consent or by revocation if the deed permits. Proper closure, following the deed’s stipulated procedures, helps avoid tax and liability complications. When closing a trust, thoroughly consider the reasons, available powers in the trust deed, and ensure compliance with all financial and legal requirements.
Frequently Asked Questions
A trust is a form of legal arrangement where a person (the trustee) holds assets and property on behalf of others (the beneficiaries). A family trust, otherwise known as a discretionary trust, is a great way to manage and protect family assets. For example, the trustee may manage the trust’s assets for specific children (beneficiaries) until they turn 18.
A trust deed is a legal document that sets out the terms, rules and conditions for creating and managing a discretionary trust. Typically, the trust deed will list the objectives of the fund and identify the beneficiaries. Likewise, it will detail how much beneficiaries are to receive and the method of payment. Importantly, the trustee must manage the trust’s assets according to the trust deed.
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