There are many reasons to dissolve a trust and almost all trusts have an expiry date. While the process may seem daunting and involves considerable paperwork, it can be fairly straight forward once you know what to do. In general, there are four reasons to end a trust:

  • distribution of trust property;
  • the settlor or trustee revokes the trust;
  • with the beneficiaries consent; and
  • a court terminates a trust.

This article will explain the process of dissolving a trust under these four reasons so that you informed on what to do if it is the right choice for your business.

1. Trust Property is Entirely Distributed

A trust dissolves when the trustee distributes its property. Distribution might occur on the trust’s formal “vesting” date or another specified date.

A vesting date is a trust’s official end date. Most trusts have a vesting date because the law states that within a given period, the legal and beneficial interest in all trust property must be held by one person. In a functioning trust, the trustee holds the legal interest in trust assets. Further, the beneficiary holds the beneficial or equitable interest.

In most Australian states, the vesting period is 80 years. However, some states have different timeframes. When a trust dissolves this way, the process requires planning and paperwork. Before vesting day, the trustee is required to:

  • determine all the assets of the trust;
  • determine how to deal with each asset. For example, an asset could be transferred to a beneficiary. Alternatively, it could be sold and the net proceeds distributed to beneficiaries;
  • discharge all the liabilities of the trust, including tax liabilities;
  • prepare trust accounts; and
  • ensure that the accounts are independently verified.

In this process, the trust deed is critical.

For example, it could detail how to distribute assets and the specific entitlements of beneficiaries.

On the appointed day, the Trustee must formally resolve to appoint all of the trust property to the beneficiaries as per the trust deed. The trustee should record distributions and the resolution to dissolve the trust.

2. The Settlor or Trustee Revokes the Trust

In some cases, you may wish to terminate a trust because the settlor or trustee formally revokes the trust. For this to occur, the trust deed must give this power to the settlor or trustee. The trust deed should also specify the exact process for this kind of trust dissolution. Much like with the distribution of trust property, it will require preparation and paperwork. It will also need to be formally noted and all records made available to beneficiaries.

3. With Beneficiaries’ Consent

In some circumstances, a trust can be dissolved upon the consent of the beneficiaries or using the rule in Saunders v Vautier. This is a nineteenth-century English case which permits a beneficiary to compel a trustee to transfer to the trust property. However, certain preconditions exist in that all beneficiaries must:

  • be of age (in Australia, 18);
  • agree to terminate the trust; and
  • have the capacity (be able to) to agree to dissolve the trust.

The process for terminating a trust in this way requires that:

  • all beneficiaries formally decide to dissolve the trust and the legal interest in all trust property is directed to them;
  • all beneficiaries collectively decide to discharge the trustee formally. They do this by executing a formal discharge;
  • the trustee formally appoints all trust property to the beneficiaries per the trust deed; and
  • the trustee declares and records the trust terminated.

4. Court Terminates a Trust

In some instances, a court will dissolve a trust. This occurs if the court is of the opinion that the trust is a sham.

For example, if the trust came into existence merely as a vehicle to avoid tax. In these cases, the court will formally order the trust dissolved.

If a court is attempting to dissolve your trust, you should seek legal advice as soon as possible.

Key Takeaways

During the course of undertaking business, you may decide that dissolving a trust is the best way forward. If so, you should undertake this dissolving process in a way that best suits your circumstances. There are four reasons to dissolve a trust, which include:

  • distribution of trust property;
  • the settlor or trustee revokes the trust;
  • with the beneficiaries consent; and
  • a court terminates a trust.

If you have any questions about dissolving a trust, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

Carole Hemingway
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