Firstly what is a trust?

In ordering trust documentation we may take for granted what it essentially is so this slide will set out some of the conceptual basics.

Other basic concepts are covered in our other trusts webinars such as the webinar on selecting the right trust for your client from 2018 and also the webinars on the life cycle of a trust, unit and hybrid trusts and the webinar on discretionary trusts.

Essentially a trust is a relationship governed by the trust deed. A trust is not a legal entity in itself.

A trust deed is done as a deed and not a mere contract so you need a witness to sign and for individuals to sign seal and deliver – reduced from the old formalities to merely stating in the execution block “sign seal and deliver”.

A deed is a more formal declaration between the parties and does not require reciprocal valuable promises between the parties legally called “good consideration” to be enforceable. Basically its just easier to do things as a deed rather than a mere contract.

The relationship is between the trustee who holds the assets on trust as what is called a fiduciary – more on that later - for the benefit of the beneficiaries who can be discretionary beneficiaries who only receive benefits at the discretion of the trustee or unit holders who are entitled to a share of the income and capital of the trust much like shareholders in a company.

The trust deed sets out everything to do with that relationship from who the key parties are to what the powers of the trustee are and how to resolve disputes.

Well generally trust deeds do all this but trust deeds all come down to their wording. If it doesn’t state it then theres a risk that someone will interpret the trust deed as not allowing it and there is an old rule that the trustee’s paramount duty is to adhere rigidly to the terms of the trust deed I think the source case was Youyang v Minter Ellison.

For example, banks often ask for deeds of variation to tailor the trust deed to allow for the trustee to guarantee and indemnify, enter into security on borrowing and transact in specific financial instruments and act as custodian if the trust deed isn’t specifically sufficient.

You can have bare trusts that don’t allow the trustee to do anything except act on the direction of the beneficial owner of the bare trust asset.

But once you allow the trustee more discretion to manage the assets of the trust then it is no longer a bare trust.

The trust can be deemed to arise before execution of the trust deed where the trust deed formalizes the terms of the trust that existed before (i.e. it was an oral agreement before and the intention to enter into a trust relation is evidenced by the conduct of the parties before signing and then the terms of the signed document). Its all up to the intention of the parties as spelled out in the trust deed. But be careful about retrospective establishment of trusts as it can muck with stamp duty so having an establishment date as the date of signing the trust deed is generally the way to go.

A trust cannot last in perpetuity and therefore must have an end date. This is generally by default 80 years in most states and territories.

A trust deed will generally have certain important features:

·        It should actually state the setup and establishment of the trust and the acceptance of the settled sum

·        Powers of the trustee to manage and deal with trust assets – these are called the ‘powers’

·        Powers of the trustee to enter into transactions, guarantee and indemnify, borrow, raise capital, grant security over assets, deal in land,

·        Rights of the trustee to be indemnified out of trust assets for carrying out their duties excluding fraud and negligence etc. These aren’t powers technically but rights.

·        How the trustee is to determine the yearly income of the trust and distribute it (and stream income for modern trust deeds)

·        Who the beneficiaries are – these are called the ‘trusts’

·        How the trustee can distribute capital of the trust in specie

·        How multiple trustees are to make decisions

·        Other controllers of the trust such as the appointor and guardian and their powers to hire/fire the trustee and where their consent is required for certain trustee acts – these are not powers only trustee powers are the actual powers in a legal sense.

·        The issuing, cancelling, transfer and reclassifying of units

·        Powers to add and exclude beneficiaries

·        Succession of trustee/appointor/guarantor offices, legal personal representative step in clauses and automatic vacation for death, incapacity, unsound mind, bankruptcy etc.

·        Exclusion of the settlor and other persons from benefiting from the trust

·        Vesting and termination of the trust and how assets are to be realized and distributed among beneficiaries/unit holders.

·        How to vary the trust deed can you vary the trusts and powers or all the provisions of the deed including the schedule and the variation clause? This would be the number one issue I deal with on a daily basis.

Its all up to the wording of the trust deed so a trust can have almost unlimited tailoring possibilities but the design of trust deeds has so far generally settled on certain norms where if they are drafted in a radically different way they can give rise to impractical or unnecessarily strange outcomes such as the guardian carrying out the appointor’s role which doesn’t mean any difference substantively but means more work for us in tailoring our documentation to change the trustee on the guardian’s power rather than that of the appointor.

Or more impracticably if the tertiary beneficiaries include companies that are related to primary or secondary beneficiaries by having just one shareholder from that group and there is a prohibition on a beneficiary from being appointed as a trustee then an exclusion of a new trustee company may need to be purchased and entered into before the usual change of trustee documentation to ensure that the trustee appointment is not invalid due to the corporate trustee having one remote beneficiary as its shareholder.

The wording of a trust can give rise to almost unlimited possibilities which make life interesting and challenging every day. There is always something new to deal with.