Trust Deed Issues in High-res

Current as of: 11 July 2024.

Dealing with trust deed issues can be both costly and time-consuming. Acis mitigates these risks by thoroughly reviewing all previous deeds as part of our standard process. This approach helps us uncover potential problems that may have been previously overlooked but now present hurdles due to increased scrutiny from banks and other third parties. 

In this edition of Acis All Areas, we sit down with Belinda Topping and James Creevy from our Legal Services team to discuss the recurring issues they frequently encounter in trust deeds and address the common questions our clients ask. We’re sharing their insights to help you identify issues early and avoid common mistakes. 

What common error often results in ratifications of trust deeds? 

Belinda: “Probably the use of incorrect or incomplete names. It’s really important to use full legal names, including middle names, and to avoid nicknames. For example, use ‘Robert’ instead of ‘Bob’. Ensuring accurate names are used helps avoid issues, especially when dealing with third parties like banks.” 

James: “I completely agree. We prepare a lot of ratifications every day because of incorrect names. It’s so important to get the name right. If someone has a middle name, make sure to include it. But don’t turn the middle name into the first name, even if that’s what they prefer to go by. Correct and complete legal names only.” 

What’s the importance of “stamping” a trust deed and when does this cause confusion? 

James: “Depending on the state or territory, duty may be payable on the establishment of a trust – but it’s worth noting before I go on, that I am limiting my comments to the establishment of trusts over non-dutiable or non-identifiable property, so typically, the establishment of trusts with a nominal settlement sum (e.g. $10). 

In jurisdictions where duty is payable, this must be done in a timely fashion otherwise dealings with third parties are likely to be difficult and interest charges may also be incurred. The requirements vary depending on the state or territory where the deed is stamped, so it’s important to get this right. 

Distinguishing between the Applicable Law or Jurisdiction of a trust and the Place of Settlement can often cause confusion in relation to the liability to duty on the establishment of trusts. So keep an eye out to identify the difference.”   

But the liability for duty on the establishment of a trust depends on where the trust is settled? 

Belinda: “Almost always, yes, stamp duty depends on where the trust is settled (i.e. the Place of Settlement in the schedule of an Acis trust deed). For example, trusts that are settled in Queensland are not dutiable and do not give rise to a liability for duty upon establishment, while trusts that are settled in Victoria or New South Wales do.  

But it’s important to remember that once established, a trust can operate and acquire assets in any Australian jurisdiction, and duty on transactions or acquisitions will be determined accordingly.” 

Why do banks sometimes ask for trust deeds to be stamped in a different jurisdiction? 

James: “Banks may mistakenly request this due to the applicable law or jurisdiction recorded in the trust deed. They might see a Victorian jurisdiction and assume the trust deed needs to be stamped there, but that is not necessarily the case. Similarly, it might sometimes be suggested that a trust deed needs to be stamped in a particular jurisdiction prior to it being able to acquire property there. Again, this is not the case, it all comes back to where the Trust was settled.” 

Does the Acis deed allow for the automatic removal of the trustee? 

James: “Yes, our trust deed has a clause that automatically removes the trustee if certain events occur, particularly those affecting the trustee’s capacity and solvency. Without going into too much detail, things like death, permanent incapacity, insolvency, liquidation, or bankruptcy can trigger this automatic removal. The idea behind this mechanism is to prioritise your client’s interests over those of a third party, like a bank. 

For example, if the trustee of a trust can no longer exercise the power to sell trust assets due to being automatically removed, then neither can the liquidator or trustee in bankruptcy. So, if a creditor wants to step in and sell a trust asset while the trustee is unable to act, they would need to get court approval first.” 

Why is the automatic removal clause included in the Acis deed? 

James: “Without a clause for automatically removing the trustee in these circumstances, a liquidator or trustee in bankruptcy is more likely to attempt to take over the trustee’s powers, including the authority to sell assets. This undermines the asset protection benefits provided by a trust structure.” 

Why don’t the banks like the automatic removal of the trustee? 

Belinda: “It comes down to competing interests. We want to make sure the trust deed provides asset protection, while the banks are focused on recovering loaned funds, and their recourse in the event of default. Banks sometimes will not lend unless this clause is removed as the absence of that clause removes a barrier for them.” 

Do you ever encounter scenarios where trusts have vested and it hasn’t been realised? 

James: “Unfortunately, we do. Not often, but it does happen and it’s certainly something for advisors to remain aware of.  Always check the vesting date to ensure the trust hasn’t already vested when performing transactions or undertaking deed reviews or during distribution season. Vesting can trigger CGT and other tax implications, so it’s crucial to be aware of the date and plan accordingly. It would be prudent to have a system in place where important things like the vesting date is recorded and regularly consulted. To ease the burden, our discretionary trust checklist is a useful tool that can be used to keep these important elements of any trust front of mind for both advisor and client.” 

What’s the role of a settlor in a unit trust? 

James: “A unit trust can validly be established with or without a settlor. Having a settlor, means that the trust is generally established over that nominal $10 settlement sum, and thus there is trust property – an essential element for the existence of a trust – from that point. If you don’t have a settlor, then you only have trust property when the unit holders pay their initial subscription fees for their units. Issues can arise, for example, if the trustee of the unit trust signs a contract to acquire property before subscription fees have been received because then there could be a suggestion that this was the initial trust property and duty may arise if the property is dutiable.  

So while a unit trust can be established validly with or without a settlor and a settlement sum, we believe it to be more cautious (albeit not a requirement) to settle a unit trust with a Settlor.” 

Are amendments to the trust deed necessary for changes in a corporate trustee’s directors or company name? 

Belinda: “No, you technically don’t need to amend the deed when you change the directors of a corporate trustee as the trustee itself remains the same. This also applies if the company changes its name, for example, from ABC Company Pty Ltd to XYZ Company Pty Ltd – no deed amendment is needed. 

That said, we do sometimes see occasions where third parties insist on the preparation of an amendment and usually, in those circumstances, there is little option but to comply despite it technically not being required.”  

What are the common issues with executing deeds? 

James: “Execution issues often arise when deeds aren’t signed according to legal standards, like Section 127 of the Corporations Act 2001 (Cth) for companies or, where individuals are executing a deed, the relevant state-based legislation. A common problem occurs when individuals who are parties to a deed witness each other’s signature. Some states don’t require witnesses, but this isn’t accepted everywhere in Australia. It’s really important to execute deeds in a way that’s accepted across all Australian jurisdictions to avoid delays from differing state requirements. 

For example, a bank in South Australia, where witnessing is required, may take issue with the execution of a trust deed signed in Victoria where there is no requirement for a witness when executing deeds. Despite Victoria not requiring a witness and the deed being validly executed in the location that it was signed, the bank in South Australia may still request that the execution of the deed be ratified, causing unnecessary cost and delay. These issues often come up during property purchases or finance applications, especially at critical times like settlement or finance approval. 

Despite recent changes in execution practices, witnessing and execution issues are still common and can undermine a deed’s validity. Until there’s a uniform national approach, it’s best to ensure deeds that are executed by companies comply with the Corporations Act 2001 (Cth) and deeds executed by individuals are signed with wet ink and independently witnessed.” 

As an Acis client, your documents benefit from the meticulous review of our expert in-house legal team, safeguarding you and your firm from the critical errors discussed above.  If you need more information or have any questions regarding matters outlined above, please don’t hesitate to contact us. 

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Acis does not provide advice in relation to commercial law, taxation, duty, company law or any other matter. We do not purport to provide advice nor should you construe anything in any correspondence with us, or material provided by us, as advice of any kind.