3 Ways to Terminate a Discretionary Trust

Australian businesses, investors and families regularly use trusts – discretionary trusts, unit trusts, hybrid trusts and testamentary trusts. However, trusts do not have an indefinite lifecycle and as such, will end – whether at the vesting date (80 years after settlement in NSW and VIC) or for other reasons. For example, running the trust has become too costly, or the purpose for which the trust was established has been fulfilled.

The most appropriate way to terminate your trust will depend on the terms of your trust deed and the reasons for termination. If your trust deed doesn’t contain the required clauses, the trustee may need to apply to the court for guidance or additional powers to vary the deed. We set out below three ways to terminate a discretionary trust.

1. Revocation of a Trust 

Although the trust deed will grant almost anyone the power to revoke a trust, it would likely be someone connected with the trust such as the trustee, appointer, settlor or beneficiary. If the trust deed does contain such a term, it is then a matter of fulfilling the requirements of the clause and revoking the trust.

2. Dissipation with the Consent of the Beneficiaries

If all the beneficiaries of a trust are of legal capacity, they can consent to terminating the trust by executing a formal agreement. The agreement would direct the trust property be distributed to all the beneficiaries and the trust subsequently terminated.

You will need to first determine whether the trust deed gives the trustee power to terminate the trust with the consent of the beneficiaries and then ensure that all beneficiaries have agreed to the planned distribution of trust property and income. Before the trustee transfers the property, the beneficiaries need to discharge the trustee. Following this, the trustee declares that the trust has been dissipated, and it comes to an end.

3. Court Order

Although courts can make orders to vary a trust deed or require the trustee to act in a particular manner, they cannot make an order to terminate or wind up a trust. The power to terminate a trust remains with those listed in the trust deed or the beneficiaries. The court can also make variations to a trust deed if it contains an express power for the court to do so.

Other factors which determine whether the court can assist include:

• The intention of the settlor;
• Whether an emergency has arisen; or
• A statutory provision exists that grants the court power to vary.

Key Takeaways

If the trust deed contemplates termination, it is a straightforward procedure. However, if the trust deed is silent on revocating the trust, then its assets may be distributed to the beneficiaries. If neither of these options are possible, then you may consider approaching the courts for assistance noting that the court’s powers are relatively restricted regarding varying a trust. If you have any questions about terminating your trust, or need assistance drafting a clause in your trust need that address termination, get in touch with our business lawyers on 1300 544 755.