As many members of the generation that discovered discretionary trusts, as the preferred legal arrangements under which to hold investments or conduct a business, now contemplate the use of these arrangements by a subsequent generation, a variety of issues are emerging.
Some of the trust deeds under which these discretionary trusts have been created were drafted 40-50 years ago when such things as the rule against perpetuities, now abolished in South Australia, were important, the taxation of capital gains was confined to rare circumstances, and much else that existed or did not, has changed or arisen.
The rule against perpetuities resulted in deeds restricting the term of a trust to a life in being at its creation, usually close by reference to a member of the British Royal family then living, plus 21 years. Often, this period was time-limited to a particular number of years, usually 80 but occasionally 60. Many of these periods will, for these early days’ trusts, terminate during the life of an ensuing generation unless they can be extended or their time limitation removed.
Another consequence of the rule has been for deeds to have commonly been drafted to forbid the vesting, meaning distribution, of any of the trust fund into a trust fund with a limitation period that may expire after that prescribed for the trust seeking to make the distribution. This restriction, where included, will, unless it can be removed, apply to prevent any distribution from an earlier to a later created trust fund.
Of course, there have been many more developments in the law relating to discretionary trusts over the period than this.
One development of significance has been the close examination given by the Courts to the power to amend a Trust Deed. This power, as drafted in earlier deeds, was often restricted to amendments applying to the administrative powers of the trustee, often specifically preventing any alteration to potential beneficial interests, and regularly preventing any alteration to already vested interests. These restrictions are clear in their effect and present difficulties in attempting amendments that may offend them. Other powers of amendment have not been drafted as restrictively. However, they can still present difficulties, such as provisions referring the power of amendment to preceding provisions of the Deed when the provisions sought to be amended are contained in a subsequent schedule to the Deed.
An issue that most powers of amendment have accommodated has been amendments to enable the streaming of capital gains and franked dividends. Consistently, also amendments to authorise the accounting treatment by the trustee of gains as income and relating to notional income amounts. Commonly, early versions of trust deeds adopted, as their means to determine trust income, the outcome of the calculation required for section 95 of the Income Tax Assessment Act 1936, a calculation that does not include amounts excluded from that calculation and which, for that reason, can prove unsuitable.
In the context of intergenerational planning there are more issues.
Most, but the earliest, trust deeds define a wide range of beneficiaries. These have been, from early times, split into two groups, respectively called Primary Beneficiaries and General Beneficiaries. These groups ordinarily refer to a named individual, that person’s spouse, their lineal descendants, possibly their spouses, companies and trust funds in which any of them have shares or any form of interest and one or more charities. Some encompass wider possibilities, including persons who might later be added.
In many cases, the referenced individuals named in these deeds are the deceased parents of mature aged members of the beneficiary classes. These members may have cooperatively managed the trust assets according to the known precedential wishes of their parents but cannot reasonably expect that level of cooperation to continue through the next generation and more so if these are to be infused with members of a later generation and spouses at one or both of these generations all with different objectives in life.
Frequently, a discretionary trust deed will stipulate what are called “Default Beneficiaries”. These are persons who will benefit from income or capital, as the case may be, in the event that the trustee does not exercise a relevant power to select other beneficiaries who will be entitled to take or share in it. These beneficiaries may be individually named or determined by reference to a specified class. Their position and definition are important and may well refer to persons or class members who are deceased or who would no longer be intended to benefit in the way the default beneficiary provision prescribes.
Further, the usual structure of the trust deeds for discretionary trusts included the nomination of an ‘Appointor’ and the bestowal on that person, these persons or their substitutes, with a discretionary power to appoint a new trustee. This power has generally been seen to be the power to control the trust. Accepting this to be so, the ability to remove or alter this person or power, those able to exercise it or the manner in which it must be exercised, is very significant. To a lesser extent, a power of the trustee to appoint a new or additional trustee and the circumstances when and how it may be exercised are also issues of considerable importance.
Another usual structure of these deeds has been the appointment of a proprietary company, uniquely dedicated to the administration of the trust, as trustee. In all likelihood, this company will have been controlled, through its shareholdings and officers, by the same person or persons nominated as the Appointor of the trust. These shareholdings are held independently of the Trust, so they do not follow any disposition of the trust assets but, to the contrary, their disposition can pass control of the trust subject to the powers of the Appointor.
The role of the trustee company in exercising its powers brings further issues requiring attention. It is trite to say, but nevertheless not be overlooked, that decision-making by the company needs to be made in compliance with its constitution. If, other than a single director company, that is to be by the directors in a meeting, any notice and quorum requirements must be met in compliance with its constitution. If purporting to be made by a single director, the constitution needs to authorise this and any requirements for recording and notifying the decision need to be observed. These obvious requirements can easily be assumed met but later emerge not to have been with difficult consequences resulting.
Another requirement simply assumed can be that all persons within what are colloquially treated as a family group are within the class of beneficiaries of the trust. For example, many of the older trust deeds include a spouse as a beneficiary without extending this to widows, widowers, putative spouses, and domestic partners. Their later inclusion with a view to their benefitting from it, particularly if effected by the widow, widower or other person acting as controller of the trustee, can be controversial. Better this situation be contemplated and provided for during the lifetime of a relevant spouse.
On the other hand, there is scope for reflection on the standard drafting of the very wide classes of beneficiaries in discretionary trust deeds. While the drafting invariably confers an absolute and uncontrolled discretion on the trustee in determining the distribution of income and capital, the Courts have moved to require the trustee to ascertain the persons and bodies within the relevant class and their circumstances as relevant to the exercise of the discretion, to reflect on the structure of the deed particularly as to the position of potentially disgruntled potential beneficiaries, to possibly articulate their reasons to the extent of demonstrating an impartial and genuine consideration of the beneficiaries and their interests. From this perspective, some of the all-inclusive drafting of beneficiary class members may be better confined. This, too, can be advantageous with respect to laws that group a discretionary trust, as an entity, with any person, or entity in which they have an interest, that is within the class of beneficiaries of the trust.
Another common issue is for assets to have been accumulated under a discretionary trust by one generation that would not be intended to be placed under the control of a single intended beneficiary, their family, or all the members of an ensuing generation. These assets may be intended to accrue for the benefit of more than one, but not all, members of a several siblings group, or there may be a single or a group of assets that would be intended for each of the siblings or groups of them. While a simple solution to this issue is to vest the relevant assets, subject to relevant liabilities in one or more selected beneficiaries, this may not be economically feasible where doing so will crystallise accrued capital gains for which there will be an income tax liability that cannot be funded or the interested parties want not to be incurred. Resolution of this issue presents significant challenges, not always able to be achieved simply or inexpensively. Some tax concessions exist that can aid the quest, but the circumstances in which they apply are limited.
Another situation not so much related to the legacy terms of trust deeds as to activity by the trustee is the historical vesting of a share of trust income in a company, creating an entitlement that is not immediately satisfied. In following the Commissioner of Taxation’s pronouncement about taxation liabilities asserted as arising from these shares, arrangements may have been created, collateral to but with separate governance to the progenitor trust deed, that will need separate consideration.
Collateral to managing the devolution of trust assets, through the preservation of the trust structure for a new generation of diverse beneficiaries is the integration of estate planning between assets held personally, including those such as shares controlling the trustee of the trust, those of a corporate beneficiary, the exercise of powers within the trust deed for the appointment of an Appointor or Trustee, and the exercise of powers reposited in the trustees and to be exercised by them or it. Trustees are constrained by a doctrine that prevents a trustee empowered with a discretion from “fettering” the exercise of that discretion, for example, by seeking to prescribe in advance its exercise. Against this, views exist that express provisions contained in a trust deed empowering the trustee to act in accordance with external directions, such as in a Will, can overcome the operation of this doctrine.
Of course, the more trusts, including a trust governing a superannuation fund, and perhaps companies as well, the more complicated the planning becomes. That said, they don’t become easier to resolve by not being addressed during the lives of those best empowered to deal with them.