When it comes to the rules that govern the operation of trusts, the deed itself is crucial.
Trust Deeds are not all alike. Not all modern Trust Deeds are suitable for use at all, let alone by sophisticated property investors.
Here are 3 common problems and the potential consequences.
The Trustee’s powers are set out in the Deed and the relevant legislation.
When the Trustee is investing on behalf of the Trust, it must have the power under the Deed to undertake the relevant investment and the related transactions.
The Bank lending to the Trust will review the terms of the Deed to ensure that the Trustee has the powers necessary to enter into the loan and mortgage arrangements with the Bank.
The Bank will want to ensure that the Trustee has powers which include powers to:
- buy property;
- borrow money;
- establish a bank account;
- offer a mortgage of the Trust’s property; and
- grant a power of attorney.
Why does it matter?
If those powers are not present, the Bank may refuse to release funds until the Deed is amended.
If this occurs in the last day or so before settlement, your purchase may be jeopardised. At the very least, you will have a stressful time arranging and urgent amendment to the Deed.
Restrictions on Distributions to Trusts
Most Trust Deeds will allow the Trustee to distribute to related Trusts. Related Trusts are Trusts in which the beneficiaries of the first Trust are also beneficiaries.
This is important to ensure that losses within a Trust can be absorbed by income from another Trust.
Many Trust Deeds contain unnecessary restrictions on which related Trusts can receive distributions. These restrictions are often buried in the clauses of the Trust Deed.
Common restrictions include prohibiting distributions to:
- Trusts created after the first Trust; or
- Trusts in which the Trustee may personally have an interest.
Why does it matter?
These restrictions can have the effect of prohibiting a distribution to many of the related Trusts.
This can restrict your ability to minimise tax or move assets as you would otherwise wish.
Sometimes Trusts have been receiving distributions in error for many years. If the ATO becomes aware of those distributions, they may tax the distributions as though they were retained by the Trustee.
Poor Succession in the Control of the Trust
The control of a Trust is held by the Trustee in the short-term. In the longer-term, the control is held by the role of Appointor (which might also be called a Principal).
Trust assets are not dealt with in your Will. The important issue is who takes control of the Trust in the event of your death.
Securing the longer-term control is vital.
Many Trusts have restrictions on the ability of the Appointor to make provisions for who will take that role on the Appointor’s death. Often, the Appointor is unaware of what is required or what the provisions are.
There is no point building up assets in a Trust structure to provide for your family if the assets will fall under the control of the wrong person in the event of your death.
Again, the terms of the Trust Deed are paramount. The terms must be understood and, if necessary, amended to ensure that you intentions will be met.
How could we help?
We can assist by reviewing the terms of your Trust Deed to ensure that they contain adequate powers and provisions for you and your intended use of the Trust.
We can establish a Trust for you which will meet your investment needs.