If you are operating a discretionary trust (which includes family trusts), it is vital to understand how to implement changes to its structure. Changing components of a trust can be a complicated process, and it is essential to ensure you comply with the law. Improper adjustments can lead to the invalidity of the trust or generate additional tax. This article will discuss the steps to remove a beneficiary or a trustee from a trust.
The Trust Deed
The trust deed sets out the processes for managing the trust, including how you can make changes to it. For example, the deed will describe whether the trust allows you to change the trustee and how you would do this. When making any change to a trust, the golden rule is to follow the trust deed’s instructions. Therefore, you should first read the trust deed when considering any update to your trust. As such, before you remove a trustee, look to your trust deed for the correct process.
Additionally, many trust deeds have a general definition of what constitutes a ‘beneficiary’. The trustee is bound to act in good faith and for the benefit of the beneficiaries. In most cases, a trust deed generally offers two processes for the removal of a beneficiary.
Most commonly, the beneficiary can sign a document to renunciate all interests as a beneficiary. Otherwise, the trustee may have discretionary power to revoke the beneficiary. This involves the trustee making a declaration that a person will no longer be a beneficiary from a stipulated date. However, this is not always the case.
Executing a Deed of Variation
Alternatively, you can amend the trust deed to remove a beneficiary or change the beneficiaries’ class. To change the trust deed to remove a beneficiary, the trustee must execute a deed of variation (also sometimes called a deed of amendment). This is a document that updates the relevant section of the original trust deed.
The deed of variation must follow the instructions provided in the trust deed. Notably, this document updates the relevant section of the original trust deed. It then forms part of the documentation of your discretionary trust and details how the trust deed has altered throughout its entire operation. Therefore, you should keep the deed of variation with the rest of your trust’s documents.
Continue reading this article below the formGrounds for Removal of a Trustee
Trustees of discretionary trusts have some discretion in managing trust assets. However, trust deeds usually provide the trustees with some degree of guidance as to how they should manage assets and the bases and procedures for removing a trustee.
Importantly, trustees have certain duties and responsibilities, including the obligation to follow the terms of the trust agreement. They must also act in good faith and in the best interests of the beneficiaries. Legal grounds to remove a trustee may include:
- breaching requirements of the trust deed;
- trust asset mismanagement, intentionally or negligently;
- trust asset fraud or misappropriation;
- self-dealing or conflict of interest. For example, if a trustee acquires assets from the trust for personal gain, particularly if the purchase is for less than fair market value;
- charging excessive fees;
- irreconcilable conflict with the other trustees or beneficiaries;
- mental incapacity of the trustee; and
- financial insolvency of the trustee, such as trustee bankruptcy.
Removal by Trustee
A serious conflict between co-trustees can lead to one or more seeking to remove another. If the appointor of the trustee is still alive, the trustees should express the problem to the appointor and ask that the other trustee be removed.
However, the appointor may be deceased or incapacitated. In this case, the trustees should convey the problem to the beneficiaries and ask them to join in seeking removal. The matter is more complicated if any beneficiary is a minor or is not explicitly named, such as when beneficiaries are designated as the children of a certain person rather than as named individuals. It is unlikely that a court would remove a trustee against the wishes of the appointor or the beneficiaries. The trustees seeking removal may also file a petition for removal, as discussed below.
Removal by Beneficiaries
Trust deeds typically include provisions that enable beneficiaries to remove or replace a trustee. Usually, a majority vote of the beneficiaries is required. Often, the trust deed provides that beneficiaries may only remove a trustee for a cause. Beneficiaries seeking the removal of a trustee may also need to file a petition for removal in some cases.
Court-Ordered Removal Process
In some circumstances, applying to court for removal may be necessary, particularly when the trust deed doesn’t provide clear removal procedures, there’s disagreement among beneficiaries or trustees about the removal, the trustee refuses to resign despite valid grounds for removal, or complex legal issues arise that require judicial determination. Applications for court-ordered removal of a trustee in Australia are typically made to the Supreme Court of the relevant state or territory and require comprehensive documentation including an originating summons or application, supporting affidavit detailing grounds for removal, copy of the trust deed, evidence supporting the removal grounds, and financial statements of the trust where relevant.
Courts will consider various legal grounds, including:
- breach of trust or fiduciary duties;
- inability to properly administer the trust;
- conflict of interest situations;
- loss of confidence by beneficiaries; and
- changed circumstances affecting the trustee’s suitability.
The courts have broad discretionary powers and may:
- remove the trustee immediately or from a specified date;
- appoint a replacement trustee;
- make orders regarding trust assets and administration; and
- award costs against the removed trustee in appropriate cases.
As such, they should generally be considered a last resort after other removal mechanisms have been exhausted or proven inadequate.
Tax Implications
The tax implications of removing beneficiaries and trustees from trusts are complex and can have significant financial consequences if not properly managed. For beneficiary removal, this generally doesn’t trigger immediate Capital Gains Tax (CGT) events but may affect future distributions and existing distribution entitlements. Removed beneficiaries lose their rights to future distributions but retain their rights to distributions for periods before their removal, and any existing streaming arrangements may need revision following their removal.
For trustee removal, the situation can be more complex as it can potentially trigger CGT if assets are transferred to a new trustee entity, particularly if the removal is deemed to constitute a “resettlement” of the trust, which could trigger CGT on all trust assets. Income tax implications must also be carefully considered, as new trustees are required to obtain a Tax File Number and update their records with the Australian Taxation Office (ATO). Additionally, trust tax returns must be updated to reflect any changes, and ABN registrations must be updated if applicable.
Stamp duty considerations are equally important, as stamp duty may apply when assets are transferred to a new trustee entity, when the removal is deemed to create a new trust arrangement, or when property is transferred as part of the removal process. State-specific rates and exemptions apply, making professional advice essential. The ATO must be notified of trustee changes, new Tax File Numbers obtained where required, and proper records maintained of all changes to ensure ongoing compliance with taxation obligations.
After proving your startup’s success in your home country, you may be thinking about the next step for growth — expanding overseas.
This free guide aims to introduce startup founders to the Australian startup market.
Key Takeaways
When amending components of a trust, it is essential to ensure you comply with the law. The trust deed will outline the instructions for the trust, including the procedures for amending it. As such, before removing a trustee or beneficiary, refer to your trust deed for the correct procedure. It is best practice to seek legal advice before attempting to amend your trust. By not following the correct procedures, you risk making yourself liable to complex legal issues, including additional tax liability.
For more information on managing your trust deed, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A discretionary trust is a type of trust where the trustee has the discretion to distribute the trust’s income and capital as they see fit. The exercise of the trustee’s discretion is governed by the terms of the trust deed of the trust.
To remove a beneficiary from the trust, you must first amend the trust deed. To do so, the trustee must execute a deed of variation (also known as a deed of amendment). This document updates the relevant section of the original trust deed and will amend the trust’s beneficiaries.
If the appointor of the trustee is still alive, the trustees should inform the appointor of the problem and request that the other trustee be removed. However, the appointor may be deceased or incapacitated. In this case, the trustees should convey the problem to the beneficiaries and ask them to join in seeking removal.
We appreciate your feedback – your submission has been successfully received.
