The Vesting of Trusts

History

Prior to medieval times in England, trusts were permitted to exist indefinitely.  However, this enabled wealthy families to hold property in their trusts indefinitely, or in perpetuity.  Ultimately, that situation was judged to be against public policy and the law changed to force the winding up (or vesting) of trusts after a specified period (the perpetuity period).

In some of the older trust deeds, the perpetuity period was generally expressed to be 21 years after the death of the last living descendant of King George V who was alive at the time the trust was established.  Some others provide for the perpetuity period to end upon the death of the principal family member who was instrumental in setting up the trust.  However, the vast majority of recent trust deeds provide for the trust to be vested 80 years from their establishment date.  This is supported by statute in all jurisdictions in Australia (often named as Perpetuities and Accumulations Act), other than in South Australia which has abolished the perpetuity period altogether.

 

What happens when a trust vests?

 This will depend on the provisions of the trust deed.  The vesting of the trust does not always end the trust or create a new trust.  The most common outcome results in the ending of the trust and its assets becoming vested in those beneficiaries who are entitled to receive the assets.  Those beneficiaries then hold a fixed interest in the capital and income of the trust.

Some trusts provide for the trustee to hold trust property for specified beneficiaries after the vesting date.  If that applies, the duties of the trustee will change.  For example, the trustee will no longer have any discretionary powers to appoint income or capital after vesting.  However, importantly, it is probably that CGT Event E1 will have occurred.

 

What happens if the trustee decides to change the vesting date?

If the trustee has no power under the trust deed to change the vesting date of the trust, a purported attempt to vest the trust on an earlier or later date will be ineffective.  The only effective way of changing the vesting date under these circumstances is to obtain an order from the Supreme Court but it is not likely that the vesting date will be changed once the original vesting date has passed.

If the trustee exercises the power conferred on it by the trust deed to change the vesting date, and provided the vesting date is not later than the perpetuity date under statute, the change is effective and there are no CGT consequences.

 

What happens if the vesting date has passed and no-one has noticed?

Continuing to administer the trust in the same manner as it was administered before the vesting date will not extend the vesting date.  It is too late to change the vesting date of a trust after it has passed.

Depending on the exact provisions of the trust deed, it will be deemed that the trustee is holding the trust property in separate trusts for the beneficiaries in quantities implied or expressed in the trust deed.  This may have CGT consequences.

 

What are the tax consequences on the vesting of a trust?

 There may be income tax implications when the trust vests depending on the trust deed, including capital gains tax (CGT) consequences.  The ATO’s views on the income tax consequences of a trust vesting are set out in Taxation Ruling TR 2018/6.