Read the Deed

Acis, current as of: 14 September 2017.

We never get tired of saying it – when dealing with trusts, the starting point is always to read the trust deed, because the wording of that document is paramount under trust law.

The trust deed is the primary source of a trustee’s powers when dealing with trust property and, more importantly, in making distributions of income or capital. There is a large body of case law which supports this principle, such as the Mercanti case which we discussed last year. More recent cases, such as Perry v Nicholson in Queensland, also highlight the need to follow the wording of the trust deed.

Failing to examine the trust deed can be critical to ensuring the outcomes which clients and accountants set out to achieve. Without a close examination of the terms of a trust deed, the actions of the trustee may, in many cases, be invalid. This can prompt a legal challenge by an interested party (let’s say, the ATO) that could cost your client dearly.

Let’s look at some examples:

• Distributions: Before distributions are made, the trustee must ensure that the intended recipients of the distribution are, in fact, beneficiaries (only beneficiaries can receive distributions). An examination of the trust deed will identify eligible beneficiaries before distributions are made. In one recent case, we saw millions of dollars of income distributed to a company which was not a beneficiary, resulting in amended assessments and a much bigger tax bill than was necessary.
• Safeguard mechanisms: Many trust deeds require that a particular person (eg Appointor/Principal/Guardian) consent to specific actions of the trustee. These are safeguard mechanisms which act to limit what the trustee can do. In the absence of evidence that the consent has been given, actions of the trustee can be deemed invalid. It’s critical that the trustee reads the deed to ensure that, where the deed requires it, consent is granted before any act is carried out.
• Accounting for capital or income: Ideally, the trust deed will confer a discretion on the trustee to account for amounts received, or paid, as either income or capital. If it does not, the trustee will be limited to dealing with amounts according to trust law principles – this can limit important tax planning opportunities.
• Transactions: Where a trustee assumes that it has the power to undertake a specific transaction, but the trust deed does not authorise the transaction, the trustee’s actions may be invalid. This can mean the transaction must be unwound. For example, where a deed does not authorise investment in a certain asset class, any investment by the trustee in that type of asset can mean the investment must be liquidated (possibly at a significant loss) and may result in personal liability to the trustee for any loss.

Of course, in most cases, shortcomings in a deed can be overcome by proper amendment of the trust deed. This needs to be undertaken after a problem has been identified and before the trustee acts in reliance on the powers (or assumed powers) it has. Assuming these powers exist without checking the trust deed is risky and, in many cases, negligent. The best course is to read the deed before acting.

Please call us on 1800 773 477 or email Legal Services if you would like further insight or assistance with your trust deeds.