What is a Trust?
A trust is a legal instrument whereby property and/or assets are held by a third-party, the trustee, on behalf of beneficiaries. Often trusts are used as a business structure to distribute income or made under a will. Trustees have a fiduciary relationship with the beneficiary meaning they must act in the best interests of any beneficiaries.
Termination of Trusts
A trust can be terminated in a number of ways. Usually, when a trust is created a trust instrument, such as a deed or will, will contain a ‘vesting date’ which is when the trust property is distributed to all the beneficiaries. Once a trust has no property the trust is dissolved.
It is important to note that a trust instrument cannot have a vesting date that is longer than 80 years. This is known as the ‘rule against perpetuities’ and is found at section 209 of the Property Law Act 1974 (QLD).
The trust instrument may also provide the trustee with specific powers to vest all the trust property at any time, therefore dissolving the trust.
A court order may also be sought seeking that a trust be terminated. Under the Trusts Act 1973 (QLD) the Supreme Court has wide and discretionary powers to make Orders in relation to trusts.
Dissolving Testamentary Trusts Early
Beneficiaries can seek to have a trust terminated by trustees when they are of adult age, under no disability and have an absolute, vested and indefeasible interest in the trust property.
This is the ‘rule’ as set out in the case of Saunders v Vautier (1841) 41 ER 482, which has been subsequently approved and followed in Australian law (see for example CPT Custodian Pty Ltd v Commissioner of State Revenue [2005] HCA 53).
Often this occurs in factual circumstances in which a beneficiary will receive trust property at a certain age. However, depending on the construction of a will that creates a trust, the Court will not always find that a beneficiary will have an absolute, vested and indefeasible interest.
To determine whether a beneficiary has an absolute, vested and indefeasible interest, regard must be had to the instrument creating the trust, the will itself.
In the NSW case of Arnott v Kiss [2014] NSWSC 1385, four grandchildren were to receive the residue of their grandmother’s estate when they turned 45. The grandchildren sought to have the property distributed to them prior to them turning 45. The issue the Court found was that upon a proper construction of the will, the deceased’s intention was that the grandchildren only had a contingent interest, that being that they survive until the age of 45.
This can be contrasted to the Queensland Supreme Court case of Re the Estate of Eleanor Middleton (deceased)[1] in which the deceased estate was to be held on trust for the daughter “until she attained the age of thirty”. The Court found that upon proper construction of the will, rather than the interest being contingent, it was the intention of the deceased that ‘the gift to the applicant should vest in her immediately’ and it was only ‘enjoyment’ of the estate was to be postponed until the daughter turned 30. The Court therefore found that the daughter was entitled to the trust property immediately.
There is case law where trustees have sought advice or orders in circumstances where a trust has been established and that a beneficiary has a contingent interest (such as surviving someone) or the class of beneficiaries has not yet closed (for example where a child may yet be born). However, it is usually in circumstances where it is very unlikely that the contingency will or will not occur.
In those circumstances, the Court has ordered that the trustee can distribute the trust property and the trust terminated, where the beneficiaries have agreed to an undertaking that should any individual in the future have an entitlement to be a beneficiary under the trust, the beneficiaries that have received the trust property will provide for that entitlement (see for example, Simpson v Trust Company Fiduciary Services Limited [2009] NSWSC 912 and Falkenhagen v Perpetual Trustee Company Limited [2017] NSWSC 580).
What if all Beneficiaries don’t want the trust terminated?
In the New South Wales Supreme Court Case of Beck v Henley [2014] NSWCA 201, the Court considered this and found that as long as there was no ‘prejudice’ to the other beneficiaries and the property of the trust was capable of being divided, property from a trust fund could be distributed, and therefore bring an end to a trust in part.
What if I am Trustee and unsure whether I can terminate a trust?
Trustees can face consequences if they misuse their trust powers or do not act in the best interests of beneficiaries. A trustee can protect themselves by utilising section 96 of the Trusts Act 1973 (QLD) (‘the Act’) which states:
RIGHT OF TRUSTEE TO APPLY TO COURT FOR DIRECTIONS
- Any trustee may apply upon a written statement of facts to the court for directions concerning any property subject to a trust, or respecting the management or administration of that property, or respecting the exercise of any power or discretion vested in the trustee.
Essentially, the above provides that a trustee can seek advice from the Court as to any action a trustee may take in respect of a trust, including whether a trust can be terminated. Pursuant to section 97 of the Act the trustee is then protected if they act upon the directions made by the Court, unless the trustee is guilty of fraud, wilful concealment, or misrepresentation.
Should you require advice on a testamentary trust or whether a trust fund can be terminated, please contact Miller Sockhill Lawyers on 07 5444 4750 to speak to one of our experienced solicitors today.
[1] QSC (No 2037 of 1998 unreported Wilson J, judgment delivered 23 September 1998)