Trusts are legal relationships where a person or company (the trustee) holds an asset for another’s benefit (the beneficiary). The trust deed sets out how the assets will be held and how any generated income should be distributed to beneficiaries. During a trust’s lifespan, you may wish to amend the terms of the trust. Alternatively, recent changes to legislation may require you to make changes to your trust. When a significant change affects the trust’s foundations, the existing trust is taken to have been resettled. This means the previous trust has ceased and the assets have been transferred to a newly created trust. As a business owner, resettlement may be undesirable because it may carry additional tax and duty payment obligations. This article will set out the causes and effects of trust resettlement and measures you can take to avoid it.

What Triggers Resettlement?

Trust resettlement occurs when the trust is fundamentally changed by amendments to the trust deed. Usually, there are express terms in the trust deed that allow for amendments, being terms which are specifically mentioned and agreed to. Changes to the trust deed will not result in a resettlement when:

  • the changes made to the trust are within the scope of the express terms of the trust deed; or
  • the changes are executed by the relevant party granted power under the trust’s rules.

This will apply unless the changes terminate the existing trust or change the rights and obligations of the parties. For example, changes made in relation to the terms of the trust deed, the trust property, or the members or beneficiaries of the trust will likely have changed the rights and obligations of the parties.

What Resettlement’s Effects?

Certain tax implications are triggered when a trust is resettled. As such, when resettlement occurs:

  • the original trust is taken to have ended;
  • the original trust’s assets are effectively disposed to the ‘new’ trust; and
  • various tax issues are triggered depending on the nature of the trust assets. For example, such as in cases of disposing trading stock or capital assets.

A capital gain or loss will be triggered when attempting to effectively dispose of a capital asset. The capital gain will then flow through to the relevant beneficiaries of the original trust in the relevant income or, failing that, be taxed in the hands of the trustee at the top marginal tax rate (and without the benefit of the 50% Capital Gains Tax discount). Further, as a resettlement is taken to create a ‘new’ trust, any losses sitting in the original trust are lost forever and cannot be used by the ‘new’ trust.

Further, it is important to remember that the assets of the trust are held in the trustee’s name. As such, whenever a trust’s trustee is changed, the title of ownership of the assets within the trust must be transferred to the new trustee. The result of this is that you may have to pay a transfer duty to complete the transfer.

How Can You Avoid Resettlement?

Before making any changes, you need to ensure that:

  • changes are within the scope of the amendment power; and
  • changes are carried out by the authorised party in accordance with the rules laid out in the trust deed.

If all these steps are followed, an amendment to your trust deed should not trigger a resettlement. Importantly, this means there should be no tax consequences. However, the scope of the amendment power and determining whether your changes fall within it is not always obvious. Therefore, you should obtain legal advice before amending your trust deed in any way to avoid resettlement consequences.

Key Takeaways

There may be situations where you or a trustee will want to amend the terms of your trust deed. While there are a variety of reasons for doing this, you should proceed with caution. You will want to ensure that changes do not trigger a resettlement and the subsequent tax consequences. To do this, you need to make certain that any changes:

  • are made express within the scope of the amendment power;
  • are made by the right entity; and
  • follow the procedures as laid out under the original trust deed.

Importantly, you should keep the scope of the amendment power broad to allow for future amendments.

Altogether, the style in which a trust deed was first written is crucial in allowing for future changes over the life of the trust. If you follow the steps set out in your original trust deed, amending your trust deed should not result in resettlement. If you need assistance drafting or reviewing your trust deed, get in touch with LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page

Natasha Bahari
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