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A trust is a legal arrangement where a person or a company (the trustee) holds assets and property on behalf of others (the beneficiaries). Most trusts have an expiry date, known as a vesting date, when the trust is wound up. Here, all assets must be distributed to the beneficiaries. However, you may also want to dissolve a trust earlier than the vesting date. There are a few different methods for dissolving a trust. Which is most appropriate for you depends on your reasons for wanting to dissolve your trust and what methods are allowed in your trust deed. This article discusses some potential reasons you may wish to dissolve a trust, and outlines the different methods to do so.
Why Dissolve a Trust?
Trusts typically have a vesting date when they must be formally wound up and dissolved. The vesting date of a trust is typically 80 years from when the trust was established, but the required time period may vary between different states and territories.
You will need to dissolve a trust when the vesting date is reached. However, there are also other circumstances when you may choose to, or be required to, dissolve a trust prior to its vesting date. Some reasons include that the:
- trust is no longer needed (for example, if you have set up a family trust for yourself and your spouse and then you separate);
- purpose of the trust is fulfilled (for example, you set up a trust in order to use it to run a business, and then you sell the business and no longer require the trust);
- running costs are too high (for example, you have received advice that the financial and tax benefits of using a trust, based on your personal circumstances, are limited and outweighed by the running costs of maintaining the trust); or
- court requires the trust to be dissolved (for example, if it is ruled that the trust is a sham trust).
Options to Dissolving a Trust
If you find yourself in a position where it is appropriate to dissolve your trust, there are four key options available to you, including:
- distributing the entire trust property;
- having the settlor or trustee revoke the trust;
- having the beneficiaries consent to dissolve the trust; or
- by court order.
We explore each option in more detail below.
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Distributing the Entire Trust Property
A trust can be dissolved by entirely distributing the trust property and winding up the trust. This can occur on the trust’s vesting date. This can also occur on an earlier date if you choose to do so. For example, if the purpose of the trust has already been fulfilled.
Dissolving a trust requires planning and paperwork. The trustee will be 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 or 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.
On the day of dissolution, the trustee must formally resolve to appoint all of the trust property to the beneficiaries in accordance with the trust deed. The trustee should record distributions and the resolution to dissolve the trust.
Revoking the Trust
A trust can also be dissolved by the settlor or the trustee revoking the trust.
The settlor or the trustee can only revoke the trust 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, and this process will also require planning and paperwork.
The revocation of the trust should be formally recorded, and the records should be made available to the beneficiaries.
Consenting to the Dissolution of the Trust
Another method of dissolving a trust is through the agreement of the beneficiaries. There are certain preconditions to the beneficiaries dissolving a trust, including that the beneficiaries:
- are aged 18 or above;
- agree to terminate the trust; and
- have the capacity to agree to dissolve the trust.
The process for dissolving a trust through the consent of beneficiaries is as follows:
- the beneficiaries together agree to dissolve the trust;
- the beneficiaries discharge the trustee;
- trust property is directed to the beneficiaries; and
- it is recorded that the trust is terminated.
By Court Order
A trust can also be dissolved by court order.
Rather than dissolving a trust, the court could also require that:
- a trust be varied; or
- the trustee must act in a particular way.
If there is a risk that the court could dissolve your trust, you should seek legal advice. This advice will assist you in understanding the implications of this, and in knowing your options.
Frequently Asked Questions
A trust is a legal arrangement where a person or a company (the trustee) holds assets and property on behalf of others (the beneficiaries). Most trusts have an expiry date, known as a vesting date, when the trust is wound up. However, there are options to wind the trust before its vesting date. This process is known as dissolving a trust.
The key parties to a trust include the settlor, trustee, appointer and the beneficiaries. The settlor is an individual whose role is to place the property into the trust. This is known as a settlement or gift. The trustee is the legal owner of the trust’s assets and is in charge of distributing and managing those assets as per the trust deed. Likewise, the appointer can appoint and remove trustees under the trust deed. Finally, beneficiaries are individuals listed in the trust deed who have entitlements to the trust’s income.
There are a few options when dissolving a trust. Firstly, the trustee can distribute all the property of the trust according to the trust deed. Alternatively, the settlor or trustee can revoke the trust. For example, there are certain situations where it may no longer be appropriate to maintain the trust. Another option is dissolving the trust through an agreement of the beneficiaries. Finally, a court order can enforce the dissolution of a trust.
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