Trust Distributions – Be Careful

In the lead up to another 30 June, Domazet v Jure Investments Pty Limited [2016] ACTSC 33 (7 March 2016) is a timely example of the problems that can arise when a trust deed is not carefully reviewed before trust distributions are made. In particular, the case highlights the perpetuity issues that can arise when distributing from one trust to another.

Two trusts were involved – the Domazet Family Trust established on 1 April 1980 (‘the Family Trust’) and the Doma Finance Trust established on 1 November 2005 (‘the Finance Trust’).  The applicable law of both trusts is the law of the ACT.

The Family Trust Deed gave the trustee the power to nominate additional beneficiaries, including trusts, so long as the vesting date of the other trust was not longer than that of the Family Trust. The Finance Trust had a perpetuity date of 80 years from the date of the deed or such earlier date as the trustee (with the written consent of the appointor) determines. 

In around 2009, advice was sought from lawyers regarding making a distribution from the Family Trust to the Finance Trust.  On that advice, a resolution was signed bringing forward the termination date of the Finance Trust to 31 March 2060 (1 day before 80 years from the date the Family Trust was established).

However, the documents didn’t have the effect intended because the 80 year perpetuity period didn’t apply to the Family Trust.  On 1 April 1980 in the ACT, the common law rule against perpetuities applied, ie. a life in being plus 21 years.  It wasn’t until 1985 that the ACT brought in legislation providing for an 80 year perpetuity period with a ‘wait and see’ rule. 

Accordingly, the perpetuity period for the Family Trust was the expiration of 21 years from the date of death of the last to die of the issue of King George VI as were alive at the date of the Family Trust Deed.  As it couldn’t be certain that this would happen after 31 March 2060, the trust distribution from the Family Trust to the Finance Trust would be void at the outset (with consequent taxation issues).

Rectification orders were sought in the Court so that the termination of the Finance Trust would be ‘on or no later than the Vesting Day of the Family Trust’.    

The case contains a good summary of the law and instances where rectification will be allowed where erroneous legal advice has been received. The cases in which rectification was granted had good evidence of the intention of the parties and that the intention remained when the documents were executed. The predominant intention of the trustee in this case was to vary the vesting date of the Finance Trust so as to enable it to be effectively appointed as a beneficiary of the Family Trust. 

The rectification orders sought were obtained but it should be noted that as a general rule they are difficult to obtain and the courts are reluctant to make them without clear evidence of the intention of the parties.

This case is a great reminder of the need for trust advisers to:

  1. Be careful when considering a distribution from one trust to another – read the trust deed, firstly to check that the second trust can actually be a beneficiary and secondly, to check any requirement regarding the vesting date of the second trust.
  2. Consider the date the first trust was established, the law of which State applies, and when legislation regarding the perpetuity period was enacted to ensure a correct understanding of the applicable perpetuity period.  The States brought in this law at different dates – Victoria was the first in 1968 and Queensland incorporated this law in the Property Law Act 1974. Tasmania didn’t legislate this law until 1992.
  3. If it is proposed to vary the vesting date of the second trust to ensure it will vest before the first trust, be careful of the wording of any proposed resolution.  Wording such as ‘on or no later than the vesting date of the first trust’ as sought in the rectification orders in this case is more effective than the wording used in the original resolution.
  4. Nemesis Australia Pty Ltd v FCT [2005] FCA 1273 confirmed that the ‘wait and see’ rule in each jurisdiction can be relied upon in a situation where a trust distributes to another trust with a later perpetuity date.  If it is proposed to rely on the ‘wait and see’ rule where the second trust has a later vesting date, records should be maintained to ensure that the second trust does actually vest before the first trust.  Whilst the distribution will not be void when it is made, it will become void if there is a failure to distribute out of the second trust before the vesting date of the first trust in due course. 
  5. Finally, given the complexity of these legal issues, avoid distributing from one trust to another where possible. 

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