Before amending a trust deed, it is important to carefully review the deed to determine whether the proposed amendment is permitted and what requirements must be followed. Not all trust deeds, or all provisions within them, can necessarily be amended. An ineffective or improperly made variation may also have unintended legal, taxation or duty consequences and affect the trust’s asset protection, succession planning and governance arrangements.
Why is it important to carefully review a trust deed before making amendments?
Our Estates team discuss this important topic.
Trusts are commonly established to provide flexibility, asset protection, succession planning and taxation advantages over an extended period of time. As circumstances change, however, trustees and advisers may need to consider amendments to the terms of a trust.
Changes may be required because of evolving family circumstances, business restructures, succession planning or changes in taxation and other laws. While the ability to amend a trust deed is valuable, trust deeds should not be varied without careful consideration.
A poorly drafted or improperly implemented amendment can create significant legal, taxation and administrative consequences. In some circumstances, an amendment may be ineffective. In more serious cases, changes may alter the trust relationship in a way that gives rise to taxation or duty consequences or affects the rights of beneficiaries.
For this reason, amendments should be made deliberately, within the powers contained in the trust deed and with appropriate legal and taxation advice.
The Risk of Creating a Different Trust Relationship
Historically, significant changes to a trust were often discussed in terms of whether they resulted in a “resettlement” of the trust.
The modern position is more nuanced. The fact that substantial changes are made to a trust does not, by itself, necessarily mean that the existing trust has ended and a new trust has been created.
Instead, consideration needs to be given to the legal effect of the particular amendment, including whether it is authorised by the trust deed and whether the trust continues to operate under the existing trust relationship.
This distinction is important because, in some circumstances, changes to a trust may have capital gains tax, transfer duty or other taxation consequences.
In Federal Commissioner of Taxation v Commercial Nominees of Australia Ltd (2001), the High Court considered whether significant changes to a superannuation fund meant that it ceased to be the same continuing fund. The Court emphasised the importance of continuity despite changes occurring over time.
The issue was considered further in Commissioner of Taxation v Clark (2011). The trust in Clark had undergone substantial changes, including changes concerning its trustee, beneficiaries, assets and activities. Nevertheless, the Full Federal Court found that there remained sufficient continuity for the relevant trust estate to continue.
These decisions demonstrate that significant change does not automatically result in the creation of a new trust. However, they should not be taken to mean that trustees have an unrestricted ability to rewrite a trust deed.
The nature of the amendment, the terms of the particular trust deed and the legal and taxation consequences of the change must each be considered.
Amendment Powers Are Not Unlimited
Most modern discretionary trust deeds contain a power allowing the trustee, or another nominated person, to amend the deed.
The existence of an amendment power does not mean that every proposed amendment will necessarily be valid.
The first question should always be: what does this particular trust deed permit?
The amendment power may contain procedural requirements, restrictions or conditions. Other provisions of the deed may also limit how the power can be exercised. Depending upon the terms of the deed, the consent of an appointor, guardian or another person may be required.
The trustee must also continue to comply with its fiduciary obligations when exercising its powers.
An amendment made outside the scope of the relevant power may be ineffective. This can create significant problems where later transactions, distributions, trustee appointments or succession arrangements have been undertaken on the assumption that the amendment was valid.
Taxation and Duty Risks
Even where an amendment is legally effective, taxation consequences must be considered separately.
Changes affecting beneficiary rights, trust entitlements, vesting provisions or the manner in which trust property is held may potentially have taxation consequences depending upon the circumstances.
An amendment may also have different consequences under State revenue legislation. Accordingly, the fact that a variation does not cause the trust to cease for one taxation purpose does not necessarily mean that it is neutral for all taxation and duty purposes.
Legal and taxation advice should therefore be obtained before implementing any substantial variation to a trust deed.
Asset Protection and Control
Trust amendments should also be considered in the context of the broader asset protection and succession strategy.
A discretionary trust is not simply a document for holding assets. Its effectiveness often depends upon the careful separation of legal ownership, control and beneficial interests.
Repeated changes to appointor provisions, trustee structures, beneficiary rights or other mechanisms of control can alter the practical operation of the trust. In an insolvency, family law or succession dispute, the history of the trust and the manner in which it has actually been administered may become relevant.
For that reason, amendments should not be considered in isolation. They should form part of a broader review of the client’s asset protection, succession and control arrangements.
Governance and Administrative Concerns
There is also a significant practical problem with repeatedly amending trust deeds.
Over time, a trust may accumulate an original deed together with numerous deeds of variation, changes of trustee, changes of appointor and other documents. If those documents have not been prepared and retained carefully, determining the current terms of the trust can become surprisingly difficult.
Problems commonly arise where:
- deeds are missing, unsigned or undated;
- an amendment has not followed the procedure required by the original deed;
- different amendments are inconsistent with one another;
- trustee or appointor changes have not been properly documented;
- amendments refer to provisions that have previously been altered; or
- advisers are working from an incomplete copy of the trust records.
These issues may not become apparent until many years later, often when control of the trust is changing, a trustee dies or loses capacity, an asset is being sold or a dispute has arisen.
At that point, reconstructing the history of the trust can be both difficult and expensive.
Perry v Nicholson
The decision in Perry v Nicholson [2017] QSC 163 illustrates the importance of understanding the terms of the trust deed and ensuring that changes concerning the trust and its control are undertaken consistently with the powers conferred by the deed.
Trustees and advisers should not assume that an intended change is effective merely because a document has been prepared describing that change.
The validity of an amendment, appointment or other exercise of power ultimately depends upon the terms of the trust instrument and compliance with the requirements governing the exercise of that power.
The case is therefore a useful reminder of the importance of maintaining a complete trust history and reviewing the original deed, together with all subsequent variations and appointments, before further changes are made.
When Amendments Are Appropriate
None of this means that a trust deed should never be amended.
Trusts may operate for decades. During that period, legislation changes, families evolve, businesses are restructured and succession arrangements need to be updated.
Amendments may appropriately be used to modernise administrative provisions, update trustee powers, respond to legislative developments, correct or clarify provisions or implement carefully considered succession arrangements.
The important point is that an amendment should have a clear purpose.
Before varying a trust, consideration should be given to:
- the precise amendment power contained in the deed;
- any restrictions or consent requirements;
- the effect upon beneficiaries and existing rights;
- the taxation and duty consequences;
- the impact upon control and succession arrangements; and
- whether the proposed amendment remains consistent with the broader purpose and structure of the trust.
Conclusion
The flexibility of a trust is one of its advantages, but flexibility should not be confused with an unrestricted ability to alter the trust whenever circumstances change.
Trust deeds should be amended carefully and only after considering the legal, taxation, succession and practical consequences of the proposed change.
Just as importantly, every amendment should be properly executed and retained with the original trust records so that future trustees, beneficiaries and advisers can clearly identify the terms upon which the trust operates.
Careful drafting at the outset, disciplined administration throughout the life of the trust and periodic review of the trust’s succession and control arrangements are essential to maintaining an effective trust structure over the long term.