Trusts

Glossary of Key Terms used in the Law of Trusts

Appointor / Principal

Is the term used in modern Trust Deeds to describe the person who has the power to appoint and remove the trustee.

Accordingly, the Appointor assumes indirect control over the whole operation of the Trust.

We generally recommend joint Appointors or at least a clear succession should the Appointor die.

If there is no nominated successor, the Appointor’s legal personal representative succeeds as the Appointor.

Where an Appointor is deemed to have lost legal capacity (e.g. which might be a possibility if the Appointor suffers from a mental condition such as dementia) and where an Enduring Power of Attorney is in place, the Attorney succeeds as the Appointor.

ATF

‘As trustee for’.

Beneficiary

Any ascertainable person or group of people can be the beneficiary of a private express trust.

Person includes a legal person (also called a legal entity) such as a corporation, unincorporated association, etc.

Charitable trust

A trust is a charitable trust when it is established for charitable purposes (objects).

“A purpose trust that is directed to exclusively charitable purposes and that exhibits public benefit".

A Charitable Trust may be quite general (for example for the relief of poverty) or highly specific (for example the care of the aged in a specific geographic region).

Charitable Trusts need not have any vesting date, and may exist in perpetuity.

Constructive Trust

Not really a trust.

It is a remedy decreed by the Court to prevent unjust enrichment.

The trustee will have only 1 duty: to transfer the property to the intended beneficiary as determined by the Court.

It is a means to disgorge a wrongdoer of ill-gotten gains.

Corpus of a Trust

Property of the trust. Any presently existing interest in property that can be transferred can be the corpus of a trust.

Cy Pres

Pronounced Sigh Pray. It is a phrase adopted from the French meaning, “as near as possible” to the original intention.

Family / Discretionary Trust

 In Australia, a Discretionary Trust is a common structure to run a business out of because it offers many taxation advantages.

For Example: The flexibility to distribute profit to different beneficiaries (including streaming of dividends to a particular individual/s), the ability to access significant capital gains concessions and stream those capital gains to a particular beneficiary.

Inter Vivos

Between living persons, someone transfers or gives property to another person while both are alive, such as a parent giving money or other property to their children.  

Trusts established during a person’s lifetime are often referred to as being an Inter-Vivos Trust.

Object

A legal term used in trusts law.  

An object of a trust is a beneficiary of that trust.

In Wills where a gift is made to a particular group or class of people, an object means someone from that group.  

For Example: The group might be described in a Will as ‘my children’ or ‘my nieces and nephews’.

Private Express Trust

A fiduciary relationship with respect to property whereby one person, the trustee, holds legal title for the benefit of another, the beneficiary, and which arises out of a manifestation of intent to create it for a legal purpose.

Resulting Trust

A resulting trust is an implied in fact trust and is based upon the presumed intent of the parties.

If a resulting trust is decreed by the court, the resulting trustee will transfer the property to the settlor if the settlor is alive, and if not, to the settlor’s estate, i.e. to the residuary devisees if any, and if none, to the intestate takers (the heirs).

Rule Against Perpetuities

At common law, the modern rule against perpetuities, is that no interest is good unless it must vest, if at all, no later than 21 years after the death of a life in being who is alive at the creation of the interest.

At common law, an interest is void from the outset if it may possibly vest outside the perpetuity period, such question being determined having regard to circumstances existing at the commencement of the period.

It is not possible at common law, to ‘wait and see’ whether the rule is in fact offended by events as they actually turn out.

The common law rule against perpetuities has been modified by legislation in all Australian jurisdictions, except South Australia where the rule has been abolished.

The most significant reforms to the common law in all jurisdictions where legislative intervention has occurred has been the introduction of a ‘wait and see’ provision, and statutory limits preventing any trust from existing for more than 80 years.

Any trust that purports or attempts to last for a longer period of time is void.

The exception to this rule is for Charitable Trusts.

Secret Trust

Generally speaking, a secret trust arises when a testator wishes to keep secret an object within the Will, such as bestowing a benefit to a political cause, or granting a trust to relatives that may be unknown to the wider family.

Secret trusts fall within two general categories: fully-secret and half-secret trusts.

The basic difference between a fully-secret and half-secret trust, is that there is no indication in the terms of the Will that a fully-secret trust exists.

Whereas, a half-secret trust will be mentioned in the Will, but may leave out the identity of the beneficiary, as well as the gift to be bestowed.

Settlor

The person who initiates the formation of the trust by the provision of the Settled Sum (usually a nominal amount). Apart from providing the Settled Sum and executing the Trust Deed, the Settlor takes no further part in the Trust operations.

A Settlor will often be a family friend or a solicitor or an accountant who will not be a beneficiary of the trust.

Note: The settlor of a Discretionary Trust must be an independent person.

Special Disability Trust

A trust which allows parents or other family members to leave assets in trust for an individual which can be used to fund ongoing care, medical expenses, accommodation, and some discretionary expenditure for that person into the future, without affecting their entitlement to a disability support pension.

Spendthrift Trust

A trust where the beneficiary is unable to transfer his/her interest, either voluntarily or involuntarily. He/She cannot sell or give away his/her right to income or corpus, and his/her creditors cannot attached these rights.

Support Trust

A trust where the trustee is required to use only so much of the income or principal as is necessary for the beneficiary's health, support, maintenance and education.

Trustee

A person (or company) appointed to hold property on trust for others, the beneficiaries subject to the terms set out in a will, as a testamentary trust. Executors are often appointed to act as trustees where a trustee role is required following administration of the estate.  However professional advisers or their firms may also be appointed depending on the circumstances.

Testamentary Trust

A trust created by a Will, which only comes into being after the testator passes away.

Testamentary Charitable Trust

A Charitable Trust created by a Will, which only comes into being after the testator passes away.

Testamentary Pet Trust

A trust for the care and support of the testator's pets created by a Will, which only comes into being after the testator passes away.

Totten Trust

Actually a Totten Bank Account [POD]* not common in Australia (used o/seas)

Trust Deed

A legal document that sets out the rules for establishing and operating your trust.

Unit Trust

The trust deed functions in much the same way as the constitution of a company, and units in the unit trust operate in a similar way to shares in a company.

Vesting Day

The Vesting Day is generally 80 years (except in South Australia) from the date of commencement of the Trust.

That is because, as a matter of law, the Trust must terminate or ‘vest’ at a date not later than 80 years after its commencement.

A provision maybe included in the Trust, which enables the Trustee to nominate an earlier Vesting Day.

What can the trustee of a Charitable Trust or the Executor of a Will do if they are unable to give effect to the intended charitable purposes?

What is a Charitable Trust?

A Charitable Trust can be defined as:

“A purpose trust that is directed to exclusively charitable purposes [1] and that exhibits public benefit [2]"

Charitable Trusts need not have any vesting date, and may exist in perpetuity

A trust is a Charitable Trust when it is established for charitable purposes (objects), which can be quite general (for example for the relief of poverty) or highly specific (for example the construction of a hospital to treat + conduct cancer research).

For many reasons, especially given the potentially infinite life-span of a Charitable Trusts, it may well find itself with insufficient funds to achieve it's stated charitable purposes.

If the Charitable Trust has been set up by an experienced lawyer, the trustee of the Charitable Trust will have an express power of amendment to alter the terms such that it's objectives match it's restated charitable purposes.

The Court may use its discretion to grant Cy Pres

If this is not the case, the trustee of a Charitable Trust is under an obligation to apply to the Court for an Order to enable property to be applied Cy Pres, or be at risk of personal liability by acting in breach of trust.

In much the same way, the Executor of a Will may find themselves in a similar situation, where the estate is not sufficient to give effect to the Willmaker's charitable gift, or simply because the nominated charity no longer exists, or there is more than one charity to select from because the Will has not been specific enough when naming the charity [3].

Cy Pres (pronounced “Sigh Pray”) is a phrase adopted from the French meaning, “as near as possible” to the original intention.

The Court will take account of all the facts and circumstances, and if they can determine that the gift was made with a general charitable intent, they may exercise their discretion to make appropriate Cy Pres orders.

Footnotes:

[1] Leahy v A-G (NSW) (1959) 101 CLR 611.

[2] Attorney-General (NSW) v Perpetual Trustee Co Ltd (1940) 63 CLR 209).” (Encyclopaedic Australian Legal Dictionary, Lexis Advance).

[3] Estate of Polykarpou; Re a Charity [2016] NSWSC 409

Credits:

This FAQ was written by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.

Can an existing Trust be a beneficiary under my Will?

Yes, a Will can nominate an existing trust as a beneficiary

A person can leave assets under their Will to the trustees of a trust already in existence, such as a family/discretionary trust, unit trust or charitable trust.

These are collectively known as ‘inter vivos’ trusts.

In the USA, a Will devising all or part of the estate to the trustee of an existing inter vivos trust is called a Pour-Over Will.

For the gift to be valid in Australia, however, it is necessary that the disposition would not be considered a ‘delegation of testamentary power’.

What is a delegation of testamentary power?

A delegation of testamentary power is when the person making the Will (‘the testator’) gives another person the power to decide how to dispose of their estate.

Such delegations are barred by the High Court due to their decision in the case of Tatham v Huxtable (1950) 81 CLR 39, where the Court stated that:

“[i]t is a cardinal rule… that a man may not delegate his testamentary power”.

Given that trusts often have a range of beneficiaries, there is scope for argument that a gift to an inter vivos trust by a testator is effectively passing on the decision-making power for who shall ultimately benefit from the estate.

When is gifting assets to a trust under a Will not considered a delegation of testamentary power?

Each case will be assessed on its own facts and circumstances.

Examples where the gift to an existing trust is not deemed a delegation

1️⃣ Despite the above rule, section 33R of the Succession Act 1981 (Qld) states that a trust or power (created by a Will) to dispose of property is not void, if the same power or trust would be valid if the testator had made it during their lifetime.

This is especially the case if it is easy to determine with certainty who or what class of people are intended to benefit from the trust in question.

2️⃣ In the case of Gregory v Hudson [1997] NSWSC 140, the Court determined that the deceased’s gifting of his entire estate to the trustee of a family trust for the benefit of his family was valid.

In this case, the deceased chose this method so that the independent trustees would make distributions according to each beneficiaries’ individual needs, without being influenced by the tense blended familial relations.

What are the advantages of leaving a gift to an inter vivos trust?

Potential Tax Advantages

The main advantage of leaving a testamentary gift to a trust is to ensure that that gift is not deprived of the benefit of the concessions found in s 102AG of the Income Tax Assessment Act 1936 (Cth).

If the trust deed permits the trustees to accept “excepted trust property” and the trustees hold this property separately from other trust assets, minors may receive distributions from the trust generated by the separately held trust assets, whilst being taxed at the normal marginal tax rate on those distributions.

This is very different from the rate at which distributions to minors from an inter vivos trust are usually taxed – which can be up to the maximum marginal rate of tax.

Concerns regarding legal mental capacity to understand a complex WIll (incl. a Testamentary Trust)

A gift to an inter vivos trust may also be advantageous if there are concerns regarding the testator’s legal mental capacity to understand a complex Will incorporating testamentary trust/s where the benefits of a trust are still desirable.

In this case, a gift to an existing trust is a much shorter and more straightforward Will to understand, effectively lowering the hurdle that needs to be cleared to establish a valid Will.

What are the disadvantages of leaving a gift to an inter vivos trust?

The main disadvantage is the risk that the trust deed may contain express terms which do not allow for the testator’s wishes to be effectively carried out.

There may be express terms in the trust deed preventing distributions being made to certain beneficiaries, or such distributions may only be permissible with the consent of a third party.

For this reason it is important that the trust deed is reviewed by a lawyer to determine whether any such restrictions exist.

If restrictions are identified, these may be capable of being removed while the testator is still alive so that their testamentary intentions are not defeated.

Trusts in Australia

Unless the Will was prepared recently, there is also the risk that naturally arises due to the passage of time.

Generally Trusts in Australia have a maximum life of 80 years (except Charitable Trusts which can exist in perpetuity and Trusts from South Australia where the Rule against Perpetuities has been repealed).

Thus, if the trust has already been operating for a number of years it may only be capable of existing for a short time after the testator’s death (or may, in fact, have already vested, that is, the Trust may have automatically terminated by reaching its own expressly nominated expiration date).

After the Will is executed, it is also possible that the trust's circumstances may have changed such that it is no longer appropriate to receive the gift.

For example: The trust may have exposed itself to an unforeseen risk, or the control of the trust or the members of the beneficiary classes may have changed.

It is also very easy for the trustee to lose the tax advantages provided by the s 102AG concessions by accidentally mixing capital or income and therefore potentially defeating the testator’s intentions, and potentially triggering anti-avoidance tax laws.

Conclusion

In summary, the potential disadvantages of using a Will to gift assets to an existing inter vivos trust far outweigh the potential advantages.

It is preferable (assuming the requisite mental legal capacity) to draft a new Testamentary Trust(s) into the terms of the Will.

Using a new Testamentary Trust ensure the trust will:

1️⃣ Be created in accordance with the testator’s wishes;

2️⃣ Is unaffected by external factors and other risks due to the passage of time;

3️⃣ Avoids concerns regarding early vesting; and

4️⃣ Is less likely to inadvertently trigger anti-avoidance tax laws.

Therefore, unless there are concerns regarding clearing the hurdle of the legal mental capacity required for a complex Will, we highly recommend the use of Testamentary Trusts as the default trust structure used in estate planning.

Credits:

This FAQ was written by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.

What is the maximum life of a Trust in Australia?

Trusts in Australia have a maximum life of 80 years (except in South Australia^)

Any trust that purports or attempts to last for a longer period is void.

An exception exists for Charitable Trusts created with charitable objects or purposes which can endure forever.

Notes: ^ s62. of the Law of Property Act 1936 (SA) may be used by prescribed interested parties to apply to the Court for orders forcing the South Australian Trust to vest within 80 years.

Credits:

This FAQ was written by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.