Trustees warned on CGT events with family trust changes
Clients with family trusts should be very cautious when making any significant changes to the terms of beneficiaries of the trust as it could trigger a CGT event, an industry law firm warns.
Townsends Business & Corporate Lawyers said that, while discretionary trusts can offer substantial flexibility, trustees should still be cautious when making significant changes to their family trust deed.
“Trustees should be cautious about this general perception of flexibility, and should not assume that the same flexibility is afforded to their trust when varying its terms or beneficiaries,” the law firm said in an online update.
If any change in terms of beneficiaries or appointors of the trust triggers a resettlement, the consequences can be expensive, it warned, including occurrence of a CGT event deeming all assets of the trust to be transferred to a new trust at market value.
The law firm gave an example of John and Mary, who are the trustees of their family trust with one of their sons, James, being the only default beneficiary.
“If the trustees didn’t decide otherwise, James as the default beneficiary would receive the trust income annually. James needs a large sum of cash urgently for his business and arranges with John and Mary that if he is paid a substantial lump sum from capital of the trust, he can be removed as a default beneficiary of the trust,” Townsends said.
“John and Mary agree to pay him the capital and remove James as the default beneficiary. They intend to add their daughter Amy in his place as the default beneficiary of the trust.”
However, the law firm warned that if the proposed changes are undertaken by John and Mary either without an appropriate power under the trust deed or not in accordance with the requirements of the power, the proposed change may trigger resettlement with unintended CGT consequences.
“The question of whether the above change is a resettlement is not necessarily a simple one and would require consideration of the trust’s assets, beneficiaries and terms in the trust deed,” it said.
“To avoid resettlement, there must be some continuity of property and membership of the trust, and the amendment should be a proper exercise of a power contained under the trust deed.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.