In this Solution in Action, we take a look at how control of a discretionary trust can be changed to implement an effective estate plan for clients with trust structures.
This Solution in Action is for clients who wish to:
Add additional beneficiaries to an existing trust without Stamp Duty
Update trust control provisions for estate and succession planning purposes
Strong Pty Ltd is a privately owned company owned and managed by family patriarch, Bob Strong. Strong Pty Ltd is the trustee of the Strong Discretionary Trust.
The changing commercial and taxation environment since the trust was created has demonstrated a lack of flexibility available to the trustee by the trust rules contained in the trust deed. Strong Pty Ltd would like to update the deed and increase the range of potential beneficiaries of the Strong Discretionary Trust.
Stamp duty rulings provide that if a beneficiary is added to a class of beneficiaries who have the benefit of default income provisions (as in this Trust Deed) or default capital provisions, then the Deed of Variation will be a resettlement for stamp duty purposes and attract stamp duty at a rate of up to 4.5% on the gross assets of the Trust.
The deed does not contain any rules to comprehensively provide a mechanism to nominate Bob's son as the new controller of the trust (and business) in the event of Bob's death or retirement.
The Trust Deed contains wide powers of variation.
Bob Strong for Strong Pty Ltd seeks advice to achieve the company's objectives.
A Deed of Variation could be prepared under which a new class of beneficiaries is created.
Members of the new class have no default rights to income or capital. In other words, if the trustee fails to allocate income in a particular year, the members of the new class will not participate in the unallocated income.
New beneficiaries are added to the new class of beneficiaries.
The Trust Deed is also amended to ensure that the discretion which the trustee has to allocate income or capital amongst beneficiaries extends to the new class of beneficiaries.
The Deed of Variation will add provisions to allow Bob, by deed, in his Will or in several other ways, to nominate a successor controller upon Bob's retirement or death. The appointment may be unconditional, or subject to specific terms and conditions.
The proposed Deed of Variation must fall within the amendment provisions contained in the existing trust deed.
The variation must be prepared in a way that does not cause a liability for stamp duty.
The Deed of Variation, therefore will not be dutiable.
Great care must be taken in the wording of the Deed of Variation.
The trustee, Strong Pty Ltd, can increase the range of beneficiaries of the trust, and update its Trust Deed without triggering a stamp duty obligation.
No stamp duty is payable when a new beneficiary is added to a trust deed in a properly drafted deed of variation.
No stamp duty is payable when the deed is updated for commercial estate or succession planning purposes.
CHECKLIST FOR CLIENTS
This list will help you determine which of your clients will benefit most from implementing a Trust Deed Variation:
Client with discretionary trusts used actively in a business;
Client with discretionary trusts used for passive investments such as property, shares, managed funds; or
Trust deeds which have not been reviewed for tax or estate planning purposes.
Please contact one of our specialist solicitors to discuss asset protection, estate planning or trusts in general, or your specific cases.
You are welcome to attend an initial personal consultation, at no charge or obligation, with one of our specialist solicitors, to discuss their individual circumstances.