Passing the baton -trusting into the future

In addition to taking steps to secure Gerald’s long-term employment and conditions with the company (see below), the parents may also wish to give him a greater equity share that the other siblings. Balancing control in discretionary trusts is a relatively unsubtle exercise and does not lend itself easily to channelling a greater proportion of dividends to one beneficiary on a fixed basis. Issuing further shares in the company or a “dividend access” share to Gerald may have value shifting implications or affect Division 152 CGT concessions. In those circumstances, an in specie distribution of shares by way of capital advancement to Gerald (either during the parents’ lifetimes, or effective upon their deaths) may be a simple and practical mechanism to achieve their wishes.

Depending upon the trust deed, the triggering of a capital gain in the trust on distribution of the shares may necessitate a further compensation consideration. With the effective withdrawal of PS LA 2005/1 (GA) from 1 July 2010, beneficiaries and trustees under deeds which do not permit the trustee to equate trust income with net income for section 95 purposes, will no longer be able to adopt the “capital beneficiary” approach previously permitted by the Practice Statement. This would have allowed the trustee and beneficiaries to effectively agree upon who bears the tax burden on that disposal. In effect, this means that the capital gains tax payable on the shares distributed to Gerald will be borne by all those beneficiaries who are presently entitled to income in that year – proportionally with their respective income entitlements. Amendment to the deed may need to be considered.

Alternatively, the appropriate course may be to make a further capital distribution of cash to each beneficiary to compensate him/her for the tax liability (i.e. have the trust effectively bear the tax). (Note however that following the decision in Bamford, even relatively old and unsophisticated deeds may enable the trustee to ensure that capital gains can be included in income for trust accounting purposes. Within the context of succession arrangements however, it should be borne in mind that matters related to deceased estates tend to attract litigation more readily than in other areas.)

A related issue when dealing with advancements and capital distributions is to note that trust deeds often have different mechanical requirements for making income and capital distributions. Income distributions can usually be dealt with by simple determination of the trustee, recorded as a directors’ resolution. On the other hand, advancements and other capital distributions may need to be effected by deed or may require the consent of the Guardian.  A directors’ resolution purporting to make an advancement to a beneficiary may be found to be invalid if the trust deed required the benefit to be granted by deed or the necessary consent of the Guardian was not obtained.

On the other hand, where a deed allows capital receipts to be treated as income for trust purposes, a distribution which would otherwise have been required to be made by a deed, may be successfully made by directors resolution if the gain is properly treated as trust fund income and the deed allows income to be distributed by trustee’s resolution.    

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