Why Wait and See May be the Best Approach

Acis, current as of: 17 September 2015.

In the last issue of Acis All Areas we looked at the rule against perpetuities, and continue the theme in this instalment to look further into the reality of how it works.

Currently, all Australian jurisdictions (except South Australia) have a statutory perpetuity period of 80 years, which effectively means that trusts can only exist for a maximum of 80 years.

In effect, all interests in the trust property must vest in beneficiaries on or before the 80 year perpetuity date. This rule made the trust void if there was any possibility that it would not vest beforehand, regardless of how absurd or remote that possibility might be.

Thankfully, wise heads have prevailed and all Australian jurisdictions (again, except South Australia) have adopted a statutory ‘wait and see’ rule as a means of avoiding the harshness of the original rule. This enables us to wait and see if the trust actually vests before the end of 80 years, rather than entertaining all manner of outlandish possibilities.

Confusion when distributing income

We are finding that many practitioners are somewhat confused about perpetuity where a trust distributes income or capital to another trust with a later vesting date. They believe this would breach the rule against perpetuities and make the whole thing void.

Of course, the vesting dates of both trusts are relevant, but they’re not the end of the story.

The ‘wait and see rule’ applies where a trust distributes to another trust with a later vesting date, meaning the distribution by the first trust only becomes void where the second trust fails to distribute to a beneficiary before the vesting date of the first trust.

Here’s the take out

  • You do not need to match the vesting date in a later trust to an earlier one, where the earlier one may distribute to the later trust;
  • It’s unlikely in the case of trust income, which has to be distributed annually, that distributions from one trust to another will not reach an ultimate beneficiary, before the termination of the first trust; and
  • As for trust capital distributions from an older to newer trust, the trustee of the later trust must ensure that the capital is distributed to an ultimate beneficiary, at some point before the termination of the older trust.

For more information, please contact Stephen Harvey on 1800 773 477.