What happens when a family trust comes to the end of its life? What happens with the assets and are there CGT or stamp duty liabilities?

Welcome to Finance and Fury, The Say What Wednesday edition. 

Today’s question comes from Gab.

Hi Louis, thank you (as always) for the great content. I’ve got another question that I’ve struggled with recently, and I’m hoping you can shed some light on the topic. I’ve setup a family trust for our investments, but, as you know, they have a limited shelf life of 80 years. What happens when a family trust comes to the end of its life? What happens with the assets and are there CGT or stamp duty liabilities? Is there a way to minimize costs and maintain the trust structure? Thanks, Gab

Hi Gab, no worries at all! Glad to hear you are enjoying it.

Great question – Preface

– not a tax expert – important to get legal advice –  but this is what I know

1. Family Trusts have an 80-year lifespan – when a trust is set up the time it is active can be set for before this, but the max is 80 years and is generally the default to maximise the benefits
   1. Known as The ‘vesting’ date – i.e. the point in time which a trust has to be wound up – in the trust deed
   2. May want to trust to wind up earlier – so change the vesting date earlier
   3. If this isn’t specified, it defaults back to 80 years. At the point of vesting, this doesn’t automatically trigger a CGT event, it is what happens after that does sadly.
2. What happens at vesting time -There are normally two options at the point of vesting.
   1. Either a new trust is created which takes over the ownership of the assets held (triggering a CGT event)
   2. No new trust is created and the beneficiaries receive the assets directly (again another CGT event) – Official wording: On the vesting of a trust the relevant beneficiaries (who are entitled under the terms of the trust deed) become absolutely entitled to the property of the trust: that is, the interests in the trust property become fixed and vested in the relevant beneficiaries.
3. Either way – Vesting of a trust may create capital gains tax (CGT) and income tax obligations
   1. Depending on which – different types of CGT events that may occur and income tax implications that may arise, these include:
   2. If the trustee and the relevant beneficiaries (who on vesting have a fixed interest) agree that the trust assets will be managed as if the trust has not vested, then this may amount to CGT event E1, whereby a new trust is created over the trust assets starting from the vesting date; and
   3. If the assets vest in a single beneficiary on the vesting date, then CGT event E5 happens when the beneficiary becomes absolutely entitled to the trust asset as against the trustee.

Stamp Duty – On property (not shares/Managed Funds) –

1. Property has double-take = CGT + transfer stamp duty – similar trigger to CGT = event triggering the absolute entitlement or a new trust is established over the property

Look at the CGT consequences of Trust Vesting

1. Determining whether or not a CGT event happens on vesting requires a close consideration of the effect of vesting as specified in the deed. This will include consideration of the effect of vesting on the nature of beneficial interests in the trust and the nature of the property held on trust.
   1. It may be the case that no CGT event happens by reason alone of the trust’s vesting. But events occurring post-vesting may cause a CGT event to happen.
2. CGT event E1: the creation of a new trust – A trust vesting of itself does not ordinarily cause the trust to come to an end and settle property on the terms of a new trust. As such CGT event E1 need not happen merely because a trust has vested.
3. Circumstances might, however, occur in which the parties to a trust relationship subsequently act in a manner that results in a new trust being created by declaration or settlement so as to cause CGT event E1 to happen.
   1. CGT event E1 happens if you create a trust over a * CGT asset by declaration or settlement. Note: A change in the trustee of a trust does not constitute a change in the entity that is the trustee of the trust (see subsection 960-100(2)). … (2) The time of the event is when the trust over the asset is created.
      1. If CGT event E1 happens and a trust is created over the assets, the trustee of the new trust is taken to acquire each asset when the trust is created and the first element of each asset’s cost base is its market value – rollover event – roll from one trust to another
      2. Exceptions – CGT event E1 does not happen if you are the sole beneficiary of the trust and:
         1. You are absolutely entitled to the asset as against the trustee (disregarding any legal disability); and the trust is not a unit trust
   2. CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust against the trustee despite any legal disability of the beneficiary. This CGT event does not happen if the trust is a unit trust – subsection 104-75(1) of the ITAA 1997
   3. CGT event E5: beneficiary becoming absolutely entitled
      1. The vesting of a trust may result in the takers on vesting becoming absolutely entitled as against the trustee to CGT assets of the trust, depending on what those CGT assets are and the particular interests of the takers on vesting.
      2. The Commissioner’s view of when a beneficiary becomes absolutely entitled and when CGT event E5 happens is explained in draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words ‘absolutely entitled to a CGT asset as against the trustee of a trust’ as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997.
      3. In certain cases CGT event E7 may happen (for example upon actual distribution of CGT assets to beneficiaries), but it will not happen to the extent the beneficiaries are already absolutely entitled to the CGT assets as against the trustee.
   4. These two are counter initiative – or mutually exclusive for any loopholes – but maybe not –
   5. Was looking at ways around this – keeping a corporate trustee that is the trustee of the new trust and retain same beneficial ownership of beneficiaries – hats off to lawyers – no wonder tax law is a booming profession with legislation
   6. No idea if this would work – but having a corporate trustee retain the assets, trust vests but indefensible entitlement to beneficiaries which aren’t absolutely entitled
      1. In English – corp trustee that has more than 1 beneficiary
4. What I have seen – In itself – the vesting of beneficial interests in a trust does not have to cause the trust to come to an end
   1. Nor cause a new trust to arise – even if vesting date is described as a ‘Termination Date’, Vesting does not mean trust property must be transferred to the takers on vesting on the vesting date, nor that the trust must be wound up either immediately or within a reasonable period (although the deed may require these events to occur after vesting)
   2. Trying to see if this is beyond the 80-year timeline –
   3. Not 100% sure if there is any way around it – I’ll do another episode if I find something good on this

If there isn’t a way out of CGT being triggered – It is normally best to start planning in advance of vesting, through the transfer of assets over a number of years in advance to minimise CGT through timing.

1. CGT timing – Spread the investments

Options to minimise Tax on Investments

(i.e. investment bonds or companies): Options –

1. Family Trust – CGT Timing –
   1. Selling off/Transferring chunks investments to the new trust – or beneficiaries over a number of years
   2. $1,000,000 gain in 1 year can result in 45% taxes on the assessable gains for most beneficiary distributions
   3. $200,000 each year for 5 years split between beneficiaries can help get assessable amount down
2. Set up an investment company – your own LIC
   1. Downside – own personally (otherwise run into trust lifespan)
   2. Might not be as tax-effective – 28.5% to 30% tax, with no CGT discount of 50%
3. Investment bond –
   1. Done in previous episodes – features covered on those episodes
   2. But tax benefits – capped at 30% with withdrawals being tax-free after 10 years
   3. FF income inside of these results in no net tax paid on Income

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