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Want to find out more about trust deeds and how to read them properly instead? See the brief overview below. This is of course a larger topic. If you need to take any actions (and are not just curious about the topic), do not rely on blog posts like these. They are are not specific to your circumstances and are more like general guidelines. After all, everyone’s situation is different and it would be impossible to write something that somehow fits everyone’s situation when it comes to trusts or anything tax related.

DIFFERENT ELEMENTS OF THE TRUST DEED

A trust deed is the foundational document of a discretionary trust. It sets out the terms, conditions, and rules that govern the trust’s operation. As you probably know. In Australia, the trust deed is crucial in ensuring the trust’s legality, functionality, and compliance with relevant laws. My post, today, looks at the essential elements of a trust deed in the context of discretionary trusts in Australia. I will detail some of the key components that must be included to create a legally sound and effective trust. But this is not a comprehensive guide by any stretch of the imagination. At best, it is a very basic summary.

1. Identification of Parties

The trust deed must clearly identify the key parties involved in the trust: the settlor, trustee(s), and beneficiaries.

Settlor

The settlor is the person who establishes the trust by transferring assets to the trustee. The settlor’s name, address, and other identifying details must be included in the trust deed. The settlor’s role typically ends after the establishment of the trust, and they should not be a beneficiary or a trustee to avoid conflicts of interest. I found that many simply use their accountants

Trustee

The trustee is responsible for managing the trust’s assets and making decisions about distributions. The trust deed must clearly identify the trustee(s), who may be individuals or corporate entities. The trustee’s powers, duties, and responsibilities should also be outlined in the deed. Yes, before you ask, companies can be trustees. Actually, this will bake your noodle. Companies can be both trustees and beneficiaries!

Beneficiaries

Beneficiaries are the individuals or entities who may benefit from the trust. In a discretionary trust, the trust deed typically lists the classes of beneficiaries rather than specific individuals. This provides the trustee with flexibility in making distributions. The deed should clearly define who qualifies as a beneficiary. Nqw, you are all thinking about tax? Well, you should be.

According to Dal Pont, “The trust deed must clearly identify the parties involved and outline their roles, providing a legal foundation for the trust’s operation” (Dal Pont 72).

2. Trustee Powers and Duties

The trust deed must outline the powers and duties of the trustee, providing guidance on how the trust should be managed.

Trustee Powers

The trustee’s powers include managing the trust’s assets, making investments, and distributing income and capital to beneficiaries. The trust deed should specify the extent of these powers and any limitations. For example, the deed may allow the trustee to invest in a wide range of assets or restrict them to certain types of investments.

Trustee Duties

The trust deed must also outline the trustee’s duties, including the duty to act in the best interests of the beneficiaries, the duty to avoid conflicts of interest, and the duty to act with care and diligence. Trustees are fiduciaries, meaning they must manage the trust’s assets with the highest standard of integrity and accountability.

Heenan notes, “The trust deed should provide a detailed account of the trustee’s powers and duties, ensuring that the trustee’s actions are guided by clear legal parameters” (Heenan 89). I bet this makes me look smart to reference things like this! Still, you should contact an accountant (us) before you do anything.

3. Distribution of Income and Capital

The trust deed must specify how the trust’s income and capital are to be distributed among the beneficiaries. In a discretionary trust, the trustee typically has the discretion to decide:

• Who Receives Distributions: The trustee can choose which beneficiaries receive distributions.
• Amount of Distribution: The trustee decides the amount each beneficiary receives.
• Timing of Distribution: The trustee determines when distributions are made.

While the trustee has broad discretion, the trust deed can provide guidelines or criteria for making distributions. For example, the deed may specify that distributions should be made to beneficiaries based on their financial need or other considerations.

According to Jacobs, “The trust deed must balance the trustee’s discretion with clear guidelines for distribution, ensuring that the trust’s objectives are met while providing flexibility” (Jacobs 78).

4. Trust Purpose and Objectives

The trust deed should clearly state the purpose and objectives of the trust. This section of the deed outlines the reasons for establishing the trust and what it aims to achieve. Common purposes of discretionary trusts include:

• Asset Protection: Protecting the trust’s assets from creditors or legal claims.
• Tax Planning: Minimizing tax liabilities through strategic distribution of income and capital.
• Wealth Management: Managing and preserving family wealth for future generations.
• Estate Planning: Ensuring the orderly transfer of assets upon the death of the settlor.

The purpose of the trust guides the trustee’s decisions and actions, ensuring that the trust operates in line with the settlor’s intentions.

Sadiq explains, “A clear statement of purpose in the trust deed provides direction for the trustee and ensures that the trust’s activities align with the settlor’s objectives” (Sadiq 114).

5. Amendment and Termination Provisions

The trust deed must include provisions for amending or terminating the trust. These provisions allow the trust to adapt to changing circumstances or legal requirements.

Amendment Provisions

The trust deed should specify the conditions under which it can be amended. This might include requiring the consent of the trustee, beneficiaries, or a court. The deed may also outline the process for making amendments, such as holding a trustee meeting or obtaining legal advice.

Termination Provisions

The trust deed must also include provisions for terminating the trust. This could occur upon a specific event, such as the death of the settlor or a certain date. The deed should specify how the trust’s assets will be distributed upon termination, ensuring that the beneficiaries receive their entitlements. I am afraid this is a painful process. So, please think carefully before starting down this path. Asset protection, tax minimisation, estate planning v/s this.

According to McGregor, “Including clear amendment and termination provisions in the trust deed ensures that the trust can be modified or concluded in a manner that is legally sound and consistent with the settlor’s wishes” (McGregor 67).

6. Administrative Provisions

The trust deed should include administrative provisions that outline the day-to-day management of the trust. These provisions may cover:

• Trustee Meetings: The frequency and procedure for holding trustee meetings, including how decisions are made and recorded.
• Record Keeping: Requirements for maintaining accurate records of the trust’s transactions, including income, expenses, and distributions.
• Reporting: Obligations for providing financial reports and updates to beneficiaries, ensuring transparency and accountability.

Donovan notes, “Administrative provisions in the trust deed provide the framework for the efficient and transparent management of the trust, ensuring that it operates smoothly and in compliance with legal requirements” (Donovan 112).

7. Indemnity and Liability Clauses

The trust deed should include indemnity and liability clauses that protect the trustee from personal liability, provided they act in accordance with the trust deed and the law.

Indemnity Clause

An indemnity clause protects the trustee from being personally liable for any losses or damages incurred while managing the trust, as long as they act in good faith and within the scope of their powers. This clause is essential for encouraging trustees to perform their duties without fear of personal financial risk.

Liability Clause

The liability clause outlines the circumstances under which the trustee may be held liable for breaches of trust, such as acting outside the terms of the trust deed or engaging in misconduct. This clause ensures that trustees are held accountable while also providing them with protection when they act appropriately.

According to Rowland, “Indemnity and liability clauses in the trust deed are crucial for balancing trustee protection with accountability, ensuring that trustees can fulfill their duties without undue risk” (Rowland 76).

8. Conflict Resolution Provisions

The trust deed should include provisions for resolving conflicts or disputes that may arise between the trustee and beneficiaries, or among the beneficiaries themselves.

Dispute Resolution Mechanisms

The deed may outline specific dispute resolution mechanisms, such as mediation or arbitration, to be used before resorting to court proceedings. This helps to resolve disputes efficiently and amicably.

Jurisdiction

The trust deed should specify the legal jurisdiction governing the trust, which is particularly important if the trust has beneficiaries or assets in multiple states or countries. This ensures that any legal disputes are handled in the appropriate court system.

According to Donovan, “Conflict resolution provisions in the trust deed are essential for managing disputes effectively, preserving the integrity of the trust, and maintaining harmony among the parties involved” (Donovan 134).

So what, you ask?

Well, the trust deed is the cornerstone of a discretionary trust, really. It provides the legal framework that governs the trust’s operation. It is essential that the trust deed includes all the necessary elements to ensure that the trust is legally sound, functional, and aligned with the settlor’s intentions. Before dealing with any trust, anyone should always read the deed. Also, by clearly identifying the parties involved, outlining the trustee’s powers and duties, specifying distribution guidelines, and including provisions for amendments, termination, and conflict resolution, the trust deed provides a comprehensive guide for the trust’s management. With a well-drafted trust deed, discretionary trusts can effectively manage and protect assets in Australia, providing long-term benefits for beneficiaries. So, now that you know all this, can you go ahead and set 112 trusts up before your lunch break? No, I don’t think so. Neither should you. Please contact us before attempting anything and getting in trouble.

Bibliography

Dal Pont, Gino. Equity and Trusts in Australia. 6th ed., LexisNexis Butterworths, 2015.

Donovan, Richard. Australian Trust Law: A Comprehensive Guide. 2nd ed., Federation Press, 2018.

Heenan, Denis. Trusts and Fiduciary Duties in Australia. LexisNexis Butterworths, 2016.

Jacobs, B., and Battersby, G. Trusts in Modern Practice. 3rd ed., Thomson Reuters, 2019.

McGregor, Helen. Understanding Trust Law in Australia. Oxford University Press, 2015.

Rowland, Peter. Australian Trust Law: A Practical Guide. 3rd ed., LexisNexis Butterworths, 2016.

Sadiq, Kerrie. Australian Taxation Law. 30th ed., CCH Australia Limited, 2020.