- MCW In Focus Professionals Update

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1 - MCW In Focus Professionals Update Lost The Trust Deed? Chris Davis - Corporate & Commercial Brisbane - T E cdavis@mcw.com.au July 31, 2015 The loss of the original trust deed for a trust is not a problem to be taken lightly. While the trust will continue to operate, administering it will be difficult and uncertain without any trust deed to have regard to. Any third parties or government authorities who have dealings with the trust may take issue and the actions of the trustees of the trust may be open to challenge by any potential beneficiary because the trustees will have little evidence to justify the decisions they make. Can the problem be ignored? For trusts with few assets or passive investments, it may be possible to administer the trust in accordance with the relevant law and continue as is. This is certainly the easiest and cheapest option, but this is a short-term solution and will not be sufficient if the trustee runs into problems or there are disputes between the trustees or beneficiaries. The Trusts Act 1973 (Qld) provides a set of duties and powers for trustees which form a background to the provisions of individual trust deeds, such as duties to act fairly between income and capital beneficiaries and avoid conflicts and powers to sell trust property. This legislation might be useful for trustees where the trust deed has been lost, by acting as a default position for the trustee to rely on. The effectiveness of this solution is dependent on the nature of the trust. Trusts which require frequent management, such as trusts carrying on a business, will have their own unique set of provisions in the lost trust deed and reliance on trusts legislation will be insufficient. How to go about finding the trust deed It is advised to exhaust all possible avenues to locate the trust deed, as the best solution in these circumstances is to find the trust deed. Possible search activities are: Page 1 of 5

2 contacting current or former trustees, directors of corporate trustees and beneficiaries; contacting the beneficiaries; contacting any person who may have accessed a copy of the trust deed (e.g. accountants, auditors, legal or financial advisors, the provider of the trust deed); checking with those who may have needed to sight a copy of the deed, such as banks and titles registries; and checking any place where the deed or related documents have been stored. Note that even if these searches all prove fruitless, it will still be useful for the trustee to undertake them and document the searches as this evidence will need to be tendered should the trustee be the subject of any legal proceedings in relation to the trust. Court intervention Approaching a court to confirm the trust or obtain directions is the safest and most reliable solution in terms of providing clarity for all parties involved and an order which can be relied upon by the trustee. Unfortunately, it will likely also be the most expensive method. Copies of the Trust Deed An unexecuted and unstamped copy of a trust deed will generally serve as a sufficient substitute if the court ratifies it and orders that the copy shall stand as the terms of the trust in place of the terms of the original trust deed. If the copy is unsigned or unexecuted, the adequacy if this document will depend on the evidence which can be compiled to support the claim that the copy reflects the terms of the trust and any other surrounding circumstances. [1] There must be clear and convincing evidence of both the existence and the contents of the original document for a person claiming that an original executed deed exists. Such evidence must be provided from the trustee of the original trust deed, the principal beneficiaries and the settlor (if still alive). These persons may need to prove, among other things: that the trust has been properly established; the terms of the lost trust deed; the assets in the trust fund; and any searches and enquiries undertaken in an attempt to find the lost trust deed. Beneficiaries executing a Deed of Variation Page 2 of 5 Copyright McInnes Wilson Lawyers

3 A decision[2] in the New South Wales Supreme Court may provide some hope. In this case a superannuation fund had to be varied for the beneficiaries to receive the deceased member s benefits. This required the approval of the principal employer who refused to grant it. The beneficiaries applied to the court to vary the trust deed. The court recognised that where the beneficiaries are all adults and of sound mind and agree to a variation of the trust deed, this variation can be validly executed without the need for court intervention. An approach relying on the principles of this case would involve executing a deed of variation including as many beneficiaries as practical, and putting in place a new set of governing rules. Note there are still some practical difficulties with doing so, such as where the beneficiaries of a trust may be numerous and include infants and future beneficiaries. If the trust deed has been lost, there may be no way to confirm the identity of the beneficiaries. The biggest hurdle will be if beneficiaries disagree on the terms of the original deed. Without sufficient evidence to prove the terms, it is unlikely the deed of variation could be executed in these circumstances. Deed of confirmation or restatement Another option where a copy of the trust deed can be found (especially a copy of the executed trust deed) is to execute a deed of restatement or deed of confirmation, which effectively restates or confirms that the terms of the deed reflect the terms in the copy. Dealing with third parties If the administration of the trust is straight-forward and the beneficiaries and trustees have a good relationship, trustee-beneficiary dealings should continue largely unaffected. This is not the case when dealing with third parties. Having no authoritative evidence of the identity of the beneficiaries may not satisfy authorities interested in the trust, such as the Titles Office or the ATO. Furthermore, deeds variation or deeds of confirmation or restatement may not satisfy the Commissioner of Taxation. [3] In this case, the trust would likely be taxed on the basis of their actual activities rather than on the basis of the rights and obligations under the new or confirmed terms of the trust. [4] Page 3 of 5

4 Trustees should also be concerned about the lack of protection afforded them given that they cannot be certain they were at all times acting in accordance with the original trust deed. Terminating the trust and rolling over the assets For a Self Managed Super Fund (SMSF) it may be possible to terminate the SMSF and roll over the benefits into a new one. Unfortunately, it is not quite this simple. It is highly likely that the trustee of the new SMSF will be a related party (such as a member of the fund or a relative or business partner of a member) of the trustee of the old SMSF. If this is the case, the new trustee is prohibited from acquiring most of the assets from the old trustee.[5] There is an exemption in the case of the merger of superannuation funds, and it may be that the transaction can be effected in a way which allows the exemption to apply. Rolling over the benefits into a new fund in this way is most effective for small funds which own little or no assets. Transferring large assets into a new fund may incur significant duty and liability for Capital Gains Tax (CGT). CGT will also cause concern for family trusts attempting to roll over the assets into a new trust. For tax purposes, the trust will be treated as having sold the assets of the trust to the new trust for market value. However, trustees of trusts with only cash assets need not be overly concerned. Problems with open groups of beneficiaries The class of beneficiaries of a trust is open where it is not possible to ascertain all beneficiaries by reference to a fixed list or clear class of beneficiaries which a person can be said to either satisfy or not satisfy the criteria for that class. This is commonly the case with family trusts, as future beneficiaries might be unborn children. Solutions to a lost trust deed which involve terminating, varying or confirming the original trust may be unavailable where the class of beneficiaries is open because it is not certain who all the potential beneficiaries of the trust are. Therefore, the new terms of the trust may not adequately reflect the terms of the original trust deed. If the original trust deed then suddenly turns up, there could be a messy situation and some unhappy beneficiaries. How we can help Advise on taxation consequences for restatement and confirmation deeds Page 4 of 5

5 Advise on the consequences of losing a trust deed and the possible solutions to the problem Draft legal documentation to vary, terminate or confirm the terms of the trust Assisting in approaching the court to confirm the terms of a trust or seek directions under the relevant state and territory legislation Advise on a trustee s legal position as the trustee of a trust where the trust deed has been lost [1] Ron Jorgenson, A Matter of Trusts, Taxation in Australia, Volume 42 No. 1 July 2007, pg 43. [2] Re Bowmil Nominees Pty Ltd [2004] NSWSC 161. [3] Davis v FCT (2000) 171 ALR 654. [4] Ron Jorgenson, A Matter of Trusts, Taxation in Australia, Volume 42 No. 1 July 2007, pg 44. [5] Superannuation Industry (Supervision) Act 1993 s 66. Contact the article author for more info Chris Davis Corporate & Commercial Brisbane T E cdavis@mcw.com.au Page 5 of 5