Those reasons do not stand up under close scrutiny. The steps which justify the Commissioner from identifying significant differences in the trust’s operation, on the one hand, to the conclusion that a new trust had been created, on the other, lack any clear analysis based on legal principles. In particular, the reasoning employed to arrive at that conclusion appears to confuse the issue of whether a new trust is brought into existence with the issue of whether the parties can effectively achieve a similar outcome notwithstanding the continued existence of a single trust fund. The outcome may be different, but the entity remains the same.
The fact that the parties found it necessary to enter into a separate deed to address the mechanism by which both the X family and the Y family would receive entitlements under the trust would appear to clearly demonstrate that the trust fund was indeed a continuing trust fund and that no new trust resulted.
Similarly, the fact that a new trustee which is appointed to hold certain trust fund assets requires the benefits of the rights of indemnity attaching to those assets to pass to it is not a “substantial alteration” in the trust relationship – it is an obvious and logical consequence of appointing another trustee to hold specific assets if a splitting of assets between different trustees is permitted by the trust deed. Once again, instead of being inconsistent with the continuation of a single trust fund or indicating the establish of a new trust, the steps taken are a necessary consequence of the fact that a single trust fund is continuing and are entirely consistent with its continued existence as an ongoing entity.
From a legal perspective the main dangers with adopting trust splitting arrangements are likely to be found in the fact that the trust is indeed the same entity before and after the split takes place. Administering a trust fund using two trustees appointed to different trust fund assets in respect of different sub-classes of beneficiaries within the class of a continuing trust may have unexpected legal consequences. For example, the directors of a corporate trustee which assumes office as trustee over certain assets of a trust fund will need to protect their personal liability positions by ensuring that the right of indemnity of the previous trustee in respect of those assets against liabilities unconnected with those assets is excluded from the time the new trustee is appointed.
Further, if a creditor of one of the trustee companies became aware that all that stood between that company and a large additional pool of assets in the same trust fund, it would take a very close look at the indemnity provisions of the deed in question and also at the jurisdiction in which the deed was required to operate.
From a tax perspective, given the approach presently taken by the Commissioner and the uncertainties on the “resettlement” question, there will be clear and present practical risks in using “trust splitting” as a strategy for discretionary trusts in many circumstances, notwithstanding compelling arguments to the contrary.
Therefore, if this planning option is to be used, clients should be carefully advised of their potential exposure.