FAQ - Trust & Super Funds

1. DISCRETIONARY TRUST DEEDS

2. UNIT TRUST DEEDS

3. SUPERANNUATION TRUST DEED


1. DISCRETIONARY TRUST DEEDS

1.1 What is a Discretionary Trust Deed?

An arrangement called a Discretionary Trust Deed set up by Deed of Settlement (a Trust Deed) that permits a Trustee to hold assets for a beneficiary (or Beneficiaries) and to distribute income and capital between the Beneficiaries as and when the Trustee exercising a discretion decides.

The person who sets up the Trust Deed is called the settler. He or she is the person who contributes the original property or amount of money ( called the settled sum ) to enable the Trust Deed to commence (see question 1.7).

1.2 Who should be the Trustee?

The Trustee can be and individual or a company and is appointed by the appointor when the Trust Deed is first established . If the Trustee is an individual the Trustee should be some person in whom the appointor and the Beneficiaries have total confidence. More often ( and that is Patricia Holdings recommendation ) the Trustee is a company. If the Trustee is a company then the directors of the company should be individuals in whom the Beneficiaries have total confidence. Because there is a legal separation between individuals in their capacity as directors of the company and their capacity as Beneficiaries of a Trust Deed. It is very common for the directors of the Trustee company to be the same individuals as the primary Beneficiaries ( in the Patricia Holdings Deed called the nominated Beneficiaries). By doing that the nominated Beneficiaries have effective total control and management of the Trust Deed.

1.3 Who are to be the Beneficiaries?

The Beneficiaries or beneficiary are the persons or person for whom the Trust Deed is established. There are commonly two levels of Beneficiaries.

Those who are intended to be the primary Beneficiaries (in the Patricia Holdings Deed called the Nominated Beneficiaries) and those who are intended to be secondary Beneficiaries (in the Patricia Holdings Trust Deed called the general Beneficiaries) the nominated Beneficiaries are commonly family members and the general Beneficiaries are commonly in some way related to the nominated Beneficiaries and in the Patricia Holdings Trust Deed include companies Trust Deeds and similar organisations in which the nominated Beneficiaries either own shares or have an interest.

The Trust Deed also provides for Additional Beneficiaries. These are Beneficiaries (persons or companies) who are not related to the nominated beneficiaries, so are not included in the pool of General Beneficiaries (as defined above). Persons or companies related to Additional Beneficiaries are not included in the pool of General Beneficiaries.

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1.4 How is a Trustee Changed?

The existing Trustee may resign or be removed. If by resignation it can be verbal or in writing (in writing is preferable).

If there is more than one Trustee, the notice, whether verbal or in writing, is given to the other Trustee or Trustees if there is more than one Trustee. If there is only one Trustee then the notice is given to the Nominated Beneficiaries.

A Trustee can be removed by the Appointor. Depending upon the wording of the Deed, either the retiring Trustee appoints a new Trustee or the Appointor appoints a new Trustee. The appointment should be in writing, preferably by Deed and should be signed by the new Trustee and incorporate an undertaking by the new Trustee to act as Trustee and discharge the duties of a Trustee set out in the Deed and at law.

Most Discretionary Trust Deeds provide that it is the Appointor that has the power to remove an existing Trustee and appoint a new Trustee.

The Patricia Holdings Discretionary Trust Deeds provides that the Appointor is the person who may remove a Trustee and appoint a new Trustee,
BUT if there is no Appointor then a Trustee (either the retiring Trustee or a continuing Trustee) has the power to appoint a new Trustee
BUT if the Trustee has died then the deceased Trustee's Executor (Legal Personal Representative) has the power to appoint,
BUT if the Trustee or Legal Personal Representative fail or refuse to appoint then the Nominated Beneficiaries can appoint.

It is important for Trustees in NSW to be mindful that if there is a change of Trustee then the Trust Deed must provide or be amended to provide (before the new appointment is made) that neither the retiring Trustee or the new Trustee can ever be Beneficiaries of the Trust.

This is because under NSW Stamp Duty Law, if the retiring Trustee can become a beneficiary because of the retirement, then Stamp Duty is charged as if the assets of the Trust Deed had been transferred to the Trustee.

1.5 How is a new Trustee added?

In the current Patricia Holdings Discretionary Trust Deed, it is either the Trustee or the Appointor who has the authority to add a new Trustee. The appointment can be verbal or in writing (in writing is preferable). Generally the appointment is in the form of a Deed. The new Trustee must, when accepting the appointment, undertake to carry out the duties of Trustee and discharge the obligations contained in the Trust Deed and at law.

1.6 How do you remove a beneficiary?

This depends entirely upon the wording of the Trust Deed. Most Trust Deeds provide that there are two ways of removing a beneficiary.

  1. the beneficiary by document in writing renounces his or her interest as a beneficiary (A Renunciation may be mandatory if the change is made in conjunction with a Centrelink Declaration).; or
  2. the Trustee makes a Declaration that henceforth a particular beneficiary will no longer be a beneficiary. The Trustee should carefully study the Deed to make sure that the Trustee has that power. The Patricia Holdings Deed does give the Trustee the power to remove a Beneficiary. The Trustee should be very careful when removing a beneficiary not to create a re-settlement.

1.7 What is the minimum amount of a settled sum?

Any amount however small can be the settled sum. It can be as low as $1.00, commonly it is $10.00 or $100.00. It is a good idea to make the settled sum sufficiently large so as not to be completely absorbed by Bank Fees. What a Trustee must be ever vigilant for is to ensure that the settled sum is properly receipted into the funds of the Trust Deed and accounted for throughout the life of the Trust Deed. This is because if the settled sum is never paid to the Trustee as the seed capital of the Trust Deed then the Trust Deed never comes into existence.

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1.8 Who are the additional Beneficiaries?

The additional or general Beneficiaries (as they are called in the Patricia Holdings Deed) are Beneficiaries who fall within a very general description of Beneficiaries. They are in some general way related or associated (often quite distantly) to the nominated Beneficiaries ( They may include Companies, Trust Deeds, Superannuation Trust Deeds and the like in which a Nominated or other General Beneficiary has an interest ).v

A Charity can be a General Beneficiary.

1.9 How is the name of a Trust Deed changed?

It is not possible to change the name of a Deed. However, it is possible to change the name of a Trust Deed. The Trustee elects to change the name of the Trust Deed and then confirms that election in writing. A Trustee must ensure that if a Trust Deed changes its name that every person who has business dealings with the Trust Deed and every nominated Beneficiary of the Trust Deed is notified of the change of name.

1.10 Does a Trust Deed have to have a Trustee?

Yes every Trust Deed must have a Trustee. This is because the law requires that for a Trust Deed to exist there must firstly be some Trust Deed property and secondly, it is the Trustee (or Trustees) who hold the Trust Deed property on Trust Deed for a beneficiary or Beneficiaries. (There must be a separation between the legal and equitable ownership).

1.11 How is the State of Jurisdiction of a Trust Deed Changed?

The State of jurisdiction of a Trust Deed is determined by where the Trust Deed conducts its business. As soon as a Trust Deed (the Trust Deed is made up of the Trust assets) is moved from one State to the other then the jurisdiction of the Trust Deed moves to the new State. Trustees must be aware that if a Trust Deed is moved from one State to another stamp duty must be paid in the new State (in some States within one month of the Trust assets coming into the State and in other States within three months.)

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1.12 How is a Trust Deed wound up?

A Trustee winds up a Trust Deed by,

  1. making a Declaration (in writing) that the Trust Deed is to vest.( that is the Trust ends and the Trust assets be distributed to the Beneficiaries)
  2. collecting in all of the Trust assets and converting them into cash, (unless the Trustee proposes to make an in specie distribution).
  3. all debts of the Trust Deed must be paid, all tax must be paid,
  4. if the Trust Deed is a Discretionary Trust Deed, the Trustee must exercise a discretion and determine who among all the Beneficiaries is to receive the Trust Deed assets.
  5. the assets (or cash) are then distributed.
  6. notice must be given to the Taxation Department that the Trust Deed has ceased to exist.

1.13 Can a sole personal Trustee be a sole nominated beneficiary?

No, because there must be a difference between the legal person of the Trustee and the legal person of the Beneficiary to enable a Trust to exist. However it can validly be argued that in all Discretionary Trusts, because there are General Beneficiaries as well as Nominated Beneficiaries, the answer is they can be. It is Patricia Holdings experience that ALL Banks refuse to lend to a Trust where the Trustee is one and the same as the sole Nominated Beneficiary.

1.14 Can the Settlor be a Beneficiary?

No, for two reasons:

  1. Section 102 of the Income Tax Assessment Act 1936 provided that if the person who establishes a Trust Deed ( the Settlor ) has the power to terminate a Trust ( that is, is the same person as the Trustee and in some cases a Beneficiary) then the Trust Deed will be deemed not to exist and the Settlor will be personally taxed on the whole of the Trust income.
  2. If the Settlor is a Beneficiary then the Settlor will not have divested him/her self of the Trust assets and as a consequence no Trust Deed relationship can exist.

1.15 If a Beneficiary of a Trust Deed is a Trust Deed, who is to be named as the Beneficiary?

The Trustee of the beneficiary Trust Deed, "as Trustee for" the Trust Deed.

1.16 Who can be the Trustee of a Discretionary Trust Deed?

Any individual, company, or incorporated association can be a Trustee provided that the person or directors are not bankrupt, infants, or disqualified persons.

1.17 What address should be shown for Trustees and Beneficiaries?

Any address that will enable the Trustee and Beneficiary to be identified.

It will not be long until Beneficiaries will be required under the Anti Money Laundering Legislation to provide their dates of birth and tax file numbers (probably by the end of 2014).

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1.18 Must the Trustee have an Australian address?

Yes. The address of the Trustee determines the legal jurisdiction (that is the Law) applicable to the Trust Deed.

1.19 Can a Settlor be changed?

No. The sole function of a Settlor is to establish the Trust Deed. Once established and the settled sum has been paid to the Trustee the Settlor has no further involvement with the Trust Deed.

1.20 Can a beneficiary be added to a Discretionary Trust Deed?

Yes. But the definition of beneficiary in most Discretionary Trust Deed is very broad so it may not ever be necessary to add a beneficiary AND if a beneficiary that could not be contemplated under the wide definition is added then the addition will create a Resettlement with potential disastrous Capital Gains Tax and Stamp Duty requirement.

1.21 How long does a Trust Deed last?

A Trust Deed must vest (be wound up and it's assets distributed) within 80 years of being set up. The Patricia Holdings Trust Deed provide for the Trust Deed to have a maximum life of 79 years. A Trust Deed can be wound up at any time within the 79 years.

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2. UNIT TRUSTS DEED

2.1 What is a Standard Unit Trust Deed?

A Standard Unit Trust Deed is a Trust Deed divided into units all of the same class that gives the Unit holders equal rights to vote and share in the distribution of income and capital in proportion to the number of Units held.

A Unit Trust Deed does not have a Settlor.

2.2 What is a Multi-Class Unit Trust Deed?

This form of Trust Deed is a Trust Deed with different classes of units each having different rights to share in the distribution of capital and income. Some units may have a right to vote and others may not.

2.3 What is a Fixed Unit Trust Deed for NSW Land Tax purposes?

This type of Trust Deed is found only in NSW. It must be a standard Unit Trust Deed. The unit holders must at all times be entitled to the income and capital of the Trust Deed (after the payment of normal expenses). They must be entitled to have the Trust Deed would up at any time, and upon winding up the Trust Deed the Beneficiaries must be entitled if they request to the have any real estate that is owned by the Trust Deed transferred to them. The Trustee must not have any discretion as to the distribution of income or capital.

If a Trust Deed meets the requirements of section 3A of the Land Tax Management Act, then, the Trust Deed will not for Land Tax purposes be deemed a Specialty Trust Deed and will be entitled to the benefit of the Land Tax threshold exemptions available in NSW.

2.4 What is a Hybrid Unit Trust Deed?

A Hybrid Unit Trust Deed is a Unit Trust Deed that has a division that is a Discretionary Trust Deed. This type of Trust Deed is a Unit Trust Deed and a Discretionary Trust Deed combined.

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2.5 How is a Trustee Changed?

The Patricia Holdings Unit Trust Deed provides that 62% of the Unit Holders have the power to remove and appoint a Trustee (clause 34).

This percentage is a purely arbitrary figure and could be any other percentage as long as it is a majority percentage. It is important for Trustees in NSW to be mindful that if there is a change of Trustee then the Trust Deed must provide or be amended to provide (before the new appointment is made) that neither the retiring Trustee or the new Trustee can ever be Beneficiaries of the Trust Deed. This is because under NSW Stamp Duty Law if the retiring Trustee can become a beneficiary because of the retirement then Stamp Duty is charged as if the assets of the Trust Deed had been transferred to the Trustee.

2.6 How is a new Trustee added?

To add a new Trustee is relatively simple. The appointment can be verbal or in writing. The appointment is made by a 62% majority of the Unit Holders. Preferably it should be in writing. Generally the appointment is the form of a Trust Deed because a Trust Deed is a more legally binding document. The additional Trustee must when accepting the appointment undertake to carry out the duties of Trustee and discharge the obligations contained in the Trust Deed and at law.

2.7 How do you remove a beneficiary?

In a Unit Trust Deed a Beneficiary cannot be removed.

A Beneficiary can sell his or her units back to the Trustee (but only if the Trustee agrees to repurchase the units) or sell them to the other Unit Holders. If no Unit Holder wants to purchase the Units then the units can be sold on the open market if a purchaser can be found.

2.8 What is minimum number of units one can have in a Unit Trust Deed?

If the Trust Deed is a Unit Trust Deed then the nature of the Trust Deed assumes that the Trust Deed is divided into a number of units. There can be as few as one unit in a Unit Trust Deed though to avoid the possibility of a Unit Trust Deed being deemed to be a Fixed Trust Deed there should be at least two units.

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2.9 How is the name of a Trust Deed changed?

It is not possible to change the name of a Deed. However, it is possible to change the name of a Trust Deed. That is done by the Trustee electing to change the name of the Trust Deed and then confirming that election in writing. A Trustee must ensure that if a Trust Deed changes its name that every person who has business dealings with the Trust Deed and every Unit Holder is notified of the change of name.

2.10 Does a Trust Deed have to have a Trustee?

Yes, every Trust Deed must have a Trustee. This is because the law requires that for a Trust Deed to exist there must firstly be some Trust property and secondly a Trustee (or Trustees) who holds the Trust property on Trust for a beneficiary or Beneficiaries.

2.11 How is the State of Jurisdiction of a Trust Deed Changed?

The State of jurisdiction of a Trust Deed is determined by where the Trust Deed conducts its business. As soon as a Trust Deed (the Trust Deed is made up of the Trust assets) is moved from one State to the other then the jurisdiction of the Trust Deed moves to the new State. Trustees must be aware that if a Trust Deed is moved from one State to another stamp duty must be paid in the new State. ( In some States within one month of the Trust assets coming into the State and in other States within three months.)

2.12 How is a Trust Deed wound up?

A Trustee winds up a Unit Trust Deed by firstly making a Declaration (in writing) that the Unit Trust Deed is to vest.( that is the Trust end and the Trust assets be distributed to the Beneficiaries)

The Trustee must collect in all of the Trust assets and then convert them into cash (unless the Trustee proposes to make an in specie distribution). All debts of the Trust Deed must be paid, all tax must be paid. The assets (or cash) are then distributed amongst the Unit Holders in accordance with the Unit Holders entitlement.

Notice must be given to the Taxation Department that the Unit Trust Deed has ceased to exist.

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2.13 If a Unit Holder in a Unit Trust Deed is a Trust, who is to be named as the Beneficiary?

The Trustee of the beneficiary Unit Trust Deed (as Trustee for the Trust).

2.14 Who can be the Trustee of a Unit Trust Deed?

Any individual, company, or incorporated association can be a Trustee provided that the person or directors are not bankrupt, infants, or disqualified persons.

2.15 Must the Trustee have an Australian address?

Yes. The address of the Trustee determines the legal jurisdiction (that is the Law ) applicable to the Trust Deed.

2.16 How long does a Unit Trust Deed last?

A Unit Trust Deed must vest ( be wound up and it's assets distributed ) within 80 years of being set up. The Patricia Holdings Unit Trust Deed provide for the Trust Deed to have a maximum life of 79 years. A Trust Deed can be wound up at any time within the 79 years.

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3. SUPERANNUATION TRUST DEED

3.1 What is a Superannuation Trust Deed?

A Superannuation Trust Deed is a superannuation fund that has a maximum of four members and has as it's Trustee the members of the fund or a company of which the members of the fund are the directors. If there is only one member of the fund then that member plus another person must be Trustees. If that second person is the employer of the member the member and that person must be related. If the Trustee is a company then the single member can be a single director of the Trustee company.

3.2 How is a binding death benefit nomination updated?

Except in the case of a Superannuation Trust Deed a binding death benefit is only valid for three years so each three years a binding death nomination must be remade. That is, a new binding death benefit nomination must be made each three years.

It is not mandatory for Superannuation Trust Deeds to require that a Binding Nomination be renewed every 3 years.

The Patricia Holdings Trust Deed provides that the Nominations can be renewed every 3 years but do not have to be renewed. It also provides that there can be an agreement between the Trustee and the members (that binds the Trustee) setting out how the members benefits are to be distributed if the member dies.

3.3 When should a Superannuation Trust Deed be updated?

A Superannuation Trust Deed should be updated whenever there is a significant change in the law. As a general rule of thumb the Trustees of a Superannuation Trust Deed should consider reviewing the Trust Deed every two years and should update at least every four years.

3.4 How is the name of a Superannuation Trust Deed changed ?

It is not possible to change the name of a Superannuation Deed. However, it is possible to change the name of the Superannuation Trust Deed. That is done by the Trustee electing to change the name of the Superannuation Trust Deed and then confirming that election in writing. A Trustee must ensure that if a Superannuation Trust Deed changes its name that every person who has business dealings with the Trust Deed (including the Commissioner of Taxation ) and every member of the Trust Deed is notified of the change of name.

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3.5 Does a Superannuation Trust Deed have to have a Trustee?

Yes every Superannuation Trust Deed must have a Trustee. This is because the law requires that for a Trust Deed to exist (a Superannuation Trust Deed is a Trust Deed) there must firstly be some Trust property and secondly a Trustee (or Trustees) who holds the Trust property on Trust Deed for a beneficiary or Beneficiaries.

In the case of Superannuation Trust Deed the Superannuation Laws requires that a Superannuation Trust Deed must have a Trustee.

All the Members must be Trustees if the Trustees are individuals, and if the Trustee is a company then all of the members must be the directors of the Trustee company.

If there is only one member then there must be 2 Trustees if the Trustees are individuals. The Trustee who is not the member can be (i) a relative of the member; or (ii) a non-relative of the member as long as they are not the employer of the member.

If there is only one member and the Trustee is a company then the Trustee company can be a single member company of which the member is the sole director.

3.6 How is the State of Jurisdiction of a Superannuation Trust Deed Changed?

The State of jurisdiction of a Trust Deed (a Superannuation Fund is a Trust Deed) is determined by where the Trust Deed conducts its business. As soon as a Trust Deed (the Trust Deed is made up of the Trust assets) is moved from one State to the other then the jurisdiction of the Trust Deed moves to the new State.

Superannuation Trust Deeds are governed by Commonwealth Law so the law governing Superannuation Trust Deeds is the same in every State.

3.7 How is a Superannuation Trust Deed wound up?

A Trustee winds up a Superannuation Trust Deed by firstly making a declaration (in writing) that the Trust Deed is to vest (ie. that is the Trust end and the Trust assets be distributed to the Beneficiaries).

The Trustee must collect in all of the Trust assets and then convert them into cash (unless the Trustee proposes to make an in specie distribution). All debts of the Trust Deed must be paid, all tax must be paid. The assets (or cash) are then distributed amongst the members or members dependants according to the members share in the Superannuation Trust Deed.

If any member is under the age ( retirement after age 55,permanent disability, death etc) when the Superannuation Trust Deed can make payments to the member then that particular members share must be paid to another complying Superannuation Trust Deed.

Notice must be given to the Taxation Department that the Trust Deed has ceased to exist.

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3.8 Who can be a Trustee of a Superannuation Trust Deed?

Under section 17 of the SIS Act (and as set out in the definitions section of the Patricia Holdings Superannuation Trust Deed) the members must be the Trustees or if the Trustee is a Company then the Directors of the Trustee Company must be the same persons as the members. When the Trustees are individuals then the principal purpose (but not necessarily the only) of the Superannuation Trust Deed must be to pay pensions.

That restriction does not apply in the case of a Company being the Trustee.

If there is only one member of the Superannuation Trust Deed then a single member company may be the Trustee and the single member must be the director. If the Superannuation Trust Deed is a single member fund and the Trustee are individuals then because of the rule that requires a Trustee to be different from the beneficiary (member) then there must be a second Trustee who must not be an employer of the member unless the person is related to the member.

Minors (a person under 18) cannot be Trustees or directors of a Trustee Company. But a Legal Personal Representative of a minor can represent the minor.

Bankrupts and disqualified persons cannot be Trustees' or directors of a Trustee Company.

3.9 Can the Trustee of an Asset Acquisition Trust Deed for Superannuation Trust Deed be the same as the Trustee of the Superannuation Trust Deed?

No. The Superannuation Industry Supervision Act is specific, under section 67 A & B the Trustee must be a different legal person. The Trustee can be an individual, a group of individuals or a Company. The directors of the Company can be the same as he members of the Fund.

3.10 How long does a Superannuation Trust Deed last?

Under a specific provision in Superannuation Industry Supervision Act a Superannuation Trust Deed is not limited to maximum life of 80 and MUST be indefinitely continuing

3.11 What happens when all of the members of a Superannuation Trust Deed have died?

When all of the members of a Superannuation Trust Deed have died the assets of the Superannuation Trust Deed must be distributed amongst the dependants of the deceased members or paid to the personal legal representative of the deceased members to be distributed in accordance with the Will of the deceased members. If a member has given the Trustee a direction in writing either in the form of a binding nomination or in some other form then the Trustee may distribute the member's share of the fund in accordance with that direction.

Care should be taken when distributing a deceased member's share of a Superannuation Trust Deed because there are different taxation consequences attaching to different distributions.

 

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