A trust is a legal arrangement whereby one person (known as the “trustee“) holds assets on behalf of another person (known as the “beneficiary“). Trusts are commonly used for asset protection and tax planning and generally have their own special rules established by a written instrument (known as the “trust deed“).
A trust will need to be terminated or “wound up” when it naturally reaches the end of its life and “vests”. However, there are several circumstances that may arise where the trustee and beneficiaries want to bring the relationship to an end and seek to wind up the trust early, including where the:
- trust is no longer needed, or the purpose of the trust has been fulfilled;
- trustee no longer holds any assets;
- beneficiaries are old enough to take care of their own assets;
- administrative costs of running the trust are too high; or
- a Court orders the trust be wound up.
What is the vesting date?
Most trusts have an expiry date (known as the “vesting date“). In most states and territories in Australia a trust is required to “vest” or be “wound up” within a specific time period (known as the “perpetuity period“). In most Australian states and territories (to the exclusion of South Australia which abolished the rule against perpetuities), the perpetuity period is 80 years after the establishment of the trust.
We commonly also see trust deeds which provide that the vesting date will be the date upon which an event takes place, such as the date of death of a particular family member, or “the date that is 21 years following the death of the last living descendant of King George V who was alive at the time the trust was established”.
What if the trustee and beneficiaries want to wind up the trust early?
As mentioned above, there are several reasons why the trustee and beneficiaries may wish to wind up the trust prior to the vesting date.
Whether the trustee has the power to vest the trust early will depend on the rules and powers of the trustee set out in the trust deed. The trust deed may provide that the trustee needs the consent of the appointer or the beneficiaries. In some cases, the trustee may have the unilateral right to wind up the trust.
If the trustee does not have the power to change the vesting date you should speak to a lawyer to discuss whether variation of the trust is possible.
What are the usual steps to wind up a trust?
Winding up a trust involves planning and paperwork. The standard steps the trustee is required to complete includes:
- following the procedure set out in the trust deed;
- obtaining the formal consent of the relevant stakeholders;
- determining all the trust’s assets;
- discharging the liabilities of the trust;
- preparing and verifying the trust’s accounts; and
- recording the trustee’s decisions and making them available to the beneficiaries.
Why is it important to validly wind up a trust?
If the vesting date is approaching, you must contact your lawyer to take the necessary steps to validly wind up the trust. Missing the vesting date has significant taxation consequences.
Often the winding up process may result in new liabilities, such as CGT or GST. Where there are insufficient funds in the trust to pay those liabilities, the trustee may be legally and personally liable for those debts of the trust.
Even in circumstances where the trust deed may indemnity the trustee for any liabilities of the trust out of the trust assets, there may no longer be any assets left in the trust to pay those liabilities leaving the trustee personally liable and responsible to pay those debts.
It is important to be vigilant and remain mindful of the trust’s vesting date and the trustee’s powers to vest the trust early. If your trust’s vesting date is approaching or you wish to vest your trust early, it is important you contact a lawyer to assist you with the process.