Avoiding the Weak Link: Issues in the Chain of Trust Deeds

Emily Pritchard, current as of: 14 November 2024.

In recent months, we have seen a substantial increase in issues arising out of historical chains of trust deeds. These issues are being identified both internally by our inhouse legal team as well as externally by third parties, such as banks and commercial law firms who are reviewing documents for transactional purposes.  What has also been reported as increasing considerably in recent times, is the volume of legal disputes and litigation which focus on these historical trust deed issues.  

To ensure desired outcomes are achieved by trust deed amendments, it is crucial that they are prepared validly and in accordance with the terms of the original trust deed as well as any prior amendments. Not undertaking amendments carefully and validly gives rise to not just potential duty and CGT risks, but also the risk that desired transfers of control are not affected as intended and/or subsequent actions and amendments are potentially invalid through a domino effect.

What are Historical Chains of Trust Deeds?

Over the course of a trust’s life, amendments may be made to the trust deed, including changes to the holders of key roles as well as amendments to the trust’s provisions.  The deed establishing the trust remains a crucial document that evidences a trust’s establishment and shouldn’t be replaced by subsequent amendments. Rather, the original deed and any subsequent amendments should be kept together to complete the overall picture, or story if you like, of the trust’s deed. The original deed together with any subsequent amendments to it are often referred to as the historical chain of deeds for the trust. 

Defects

If amendments to a trust deed are not made in accordance with the provisions of the trust deed, they could be considered invalid, not only impacting the effect of the specific amendment in question, but also, any other amendments that are subsequently made in reliance on the previous amendment’s outcomes.  This can mean that desired outcomes of amendments are considered invalid.  

Consider the following examples:

Case Study #1

• The original trust deed stipulates that the Appointor has the power to remove and appoint trustees.
• A deed of amendment is prepared under which the outgoing trustee resigns and appoints a new trustee in their place.
• The validity of the appointment of the new trustee could be challenged on the basis that it wasn’t carried out in accordance with the terms of the trust deed (i.e. by the Appointor).
• Any subsequent action of the incoming trustee could also therefore be considered invalid on the basis that they hadn’t validly been appointed as trustee. 

Case Study #2

• A discretionary trust owns units in a unit trust.
• The original trust deed for the discretionary trust stipulates that the Principal can remove and then appoint trustees (but does not stipulate that a Principal can appoint an additional trustee without first removing a trustee).
• A deed of amendment is prepared under which the Principal purports to appoint an additional, corporate trustee.
• The validity of the appointment of the additional trustee could be challenged on the basis that it wasn’t carried out in accordance with the trust deed (i.e. after the removal of a trustee only).
• If the appointment of the additional corporate trustee was considered invalid there is a potential, flow-on, detrimental taxation effect in that the company would be restricted to distributing its income from the unit trust to its shareholders rather than having the taxation flexibility of distributing to the beneficiaries of the discretionary trust (as trustee).

Why the Increased Focus?

A combination of factors have likely contributed to the increased focus we are seeing on issues in historical chains of trust deeds, including: 

• Increasing financial inequity between generations.
• More complex family structures (blended families, stepchildren and parents etc).
• An increasingly litigious culture.
• An aging population, with substantial accumulated wealth in trusts, undertaking succession planning and transfers of trust control.

The Acis Advantage

Sufficient care should always be taken when preparing trust deed amendments to ensure that the amendment is valid and enforceable.  This reduces the risk of unintended consequences, including control passing to undesired recipients, distributions being considered invalid and adverse tax implications. Contact us to learn more about how we review the chain of trust deeds for every deed of amendment order we receive, to ensure that wherever possible, any historical issues in the chain of trust deeds are identified and rectified.