There are many reasons to dissolve a trust and almost all trusts have an expiry date. And while the process may seem daunting, and involves considerable paperwork, this article demystifies for you the process of dissolving a trust. It may seem obvious, but the ‘how to’ of dissolving a trust depends on the legal reason for termination. 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.
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 some other date. For example, some trust deeds do not allow for a trust to vest.
The term vesting date refers to 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 the one and same person. The law calls this the rule against perpetuities. In a functioning trust, the trustee holds the legal interest in trust assets and the beneficiary holds the beneficial or equitable interest. The rule against perpetuities simply provides a time frame for when the trustee must distribute the trust property.
In most Australian states, the 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 will 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. Settlor or Trustee Revokes the Trust
In some cases, a trust can be terminated 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. If it does, the trust is a revocable trust. The trust deed specifies the exact process for this kind of dissolution of a trust. As with the distribution of trust property above, 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 them trust property.
Certain preconditions exist. All beneficiaries:
- Must be of age (in Australia, 18);
- Must agree to terminate the trust; and
- Must have the capacity (be able to) to agree to dissolve the trust.
The process for terminating a trust in this way requires:
- All beneficiaries formally resolve to dissolve the trust such that they acquire the legal interest in all trust property 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. It is also likely to specify how to do this.
As with all legal processes, it is essential that you obtain professional legal advice. A lawyer can provide you with sound and impartial advice based on your particular circumstances. A legal professional will also ensure that the process follows best practice. This will minimise any risk of future litigation concerning the dissolution of the trust.
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