In most states and territories of Australia, a trust cannot last longer than 80 years. When it reaches its expiry (‘vesting’) date, the trust deed states how the capital of the trust is to be distributed. All the trustees have to do is to pay the trust’s creditors and then distribute the remaining capital as directed by the deed.
Distributing the capital of a trust can incur capital gains tax. Sometimes, if the trustees have the discretion to distribute the trust capital as they think fit before the vesting date and they do so, the amount of tax payable may be reduced.
Disposal or distribution of trust assets or capital may also incur stamp duty. The rules and the amount of duty that may be payable differ between states and territories.
If trustees continue to operate a trust after it reaches its vesting date, then they will be in breach of the trust deed. They may incur personal liability to the beneficiaries of the trust and to creditors (including revenue authorities). In a worst case situation, once the error is discovered, the trustees may have to compensate people who should have received trust capital. And it may be necessary to reopen previous years’ tax assessments and pay additional tax and penalties. The trustees may be unable to recover capital from people who were paid incorrectly.
All this means that that it is vital that trustees are aware of their trust’s vesting date and that they plan for what is to happen in the final year(s) of the trust’s operation. Trustees should not assume that their trust is to last for 80 years. Sometimes trusts are established for as little as 25 or 40 years.
If you’re a trustee and you don’t know when the trust is due to vest, read the trust deed!
If you would like to know more about this or anything else to do with trusts, call to speak to one of our solicitors on +61 (02) 9966 1799.