Trusts are used by families, businesses, Will makers and individuals for a wide range of reasons. The main purpose of a trust is to separate the legal ownership from the beneficial ownership of an asset – meaning, in simple terms, that one person or organisation (the Trustee) holds assets on investments for the benefit of another person or group of people (the Beneficiary or Beneficiaries).
People choose to establish trusts for many different reasons, including:
- To keep assets within a familial bloodline and guarantee investment returns
- Asset protection in case of divorce or bankruptcy proceedings
- Effective tax planning
- Protecting the interests of vulnerable beneficiaries
- Ensuring that one person is provided for a set period of time, while eventually transferring the asset to someone else.
Whatever the purpose of the Trust, the Trustee has a legal, fiduciary duty to manage the trust assets in the best interests of the Beneficiary. They are also obliged to comply with the rules of the Trust, which are contained in the Trust Deed or the terms of the Will in the case of a Testamentary Trust. There are also overarching laws that govern the operation of Trusts and the roles and responsibilities of Trustees, most notably the Trustee Act of each state.
The Trust Deed will set out who are the important players in relation to the Trust, such as the Trustee, the Appointor and the Beneficiaries. The Trust Deed will also typically set out the purpose of the Trust, what the income and capital of the trust can be used for, and importantly, when the Trust will come to an end. The ending of the Trust is usually referred to as the “Vesting Date”.
There are many different types of Trusts that are commonly set up in Wills, and each of these are designed to come to an end (or vest) upon the occurrence of a specified event. Some examples of trust Vesting Dates that we commonly see in testamentary trusts include:
- When the beneficiary attains a certain age – for example the assets might be held upon trust until a beneficiary turns 25 and then the trust vests and the assets are transferred to the beneficiary
- When the beneficiary dies – this type of trust is known as a life interest and it is used where the will maker wants to ensure that a beneficiary is provided for for the remainder of their lifetime
- When the beneficiary accomplishes something – for example a Will may set up an education fund to pay for education expenses of a beneficiary until they graduate with a tertiary qualification.
In any of these examples, it is important that the Will specifies how the assets can be used during the term of the trust, and also, who is to receive the balance of the trust funds upon the vesting date. These may be the same or different beneficiaries.
There are also other ways that a trust may be terminated, besides in accordance with the Trust Deed. A key principle when it comes to trusts in most states of Australia is what’s known as the “rule against perpetuities”. This principle means that a trust can only run for 80 years. Once 80 years have passed since the date of settlement, the Trustee is required to vest the Trust in accordance with the Deed.
Depending upon the terms of the Deed, the Trustee may have the discretion to terminate the Trust at any time by distributing all of the trust property to the beneficiaries. If there is no longer any trust property, then the trust ceases to exist. Sometimes, the consent of a third party (known as a Trust Guardian) may be required before a Trust can be terminated in this way.
The beneficiaries may also have the power to terminate a trust prior to the vesting date. This is known as the rule in Saunders v Vautier (named for the case where the principle was developed). Provided that all beneficiaries are adults and have legal decision making-capacity, they can seek to have the trust terminated before the vesting date, and all trust property distributed.
Another way in which a trust can be terminated prior to the vesting date is by a court order. This will typically arise where there is a dispute between the Trustee and the Beneficiaries which makes the continued operation of the trust unworkable. The Trustee Act permits the court to order the early vesting of a trust.
It is vital that any Trustee has a clear understanding of their obligations under the terms of the Trust Deed and the general trust law. It’s also very important that all obligations have been dealt with before a trust is terminated. This includes ensuring that all liabilities and tax obligations have been dealt with and that the beneficiaries have received their legal entitlements.
If you need any assistance with understanding the terms of a trust, your obligations as a Trustee, or how you can go about terminating a trust, our Wills and Estates lawyers can help. Contact us today on +61 3 9822 8588 or email us HERE.
