Here is an unfortunate story about an accountant who varied a trust deed on instructions from their client, and looks like ending up with real and expensive difficulties.
The trustee of the trust instructed her accountant to remove her sister’s ex-spouse as a primary beneficiary as she did not want any chance of her sister’s ex-spouse receiving any distributions from the trust.
In addition to removing the sister’s ex-spouse as a primary beneficiary, the trustee also instructed the accountant to appoint her sister as a beneficiary.
The accountant prepared a Deed of Variation of Trust. Unfortunately he did not use the correct power under the trust deed to allow the variation of beneficiaries. Nor did he make the trustee a party to the Deed of Variation as the trust deed required. As a consequence the Deed of Variation was ineffective.
However, the sister’s ex-spouse gave notice under the Deed of Variation of Trust that he did not want to remain as a beneficiary under the trust deed.
The trust deed provided that all the ex-spouse had to do to disclaim any interest in the trust estate was give notice to the trustee of his decision to that effect. The trustee documented the disclaimer in their minutes so the disclaimer was effective despite the irregularities in the way the accountant documented the matter.
A big problem – surrender of trust interest
Later the accountant read the trust deed more closely. He noticed that somewhat unusually, it provided that all beneficiaries are “takers in default”. This means that when a beneficiary disclaims an interest in the trust estate, as the sister’s ex-spouse had done, there may well be a surrender of a trust interest in the trust estate which will attract liability to pay stamp duty on the underlying transfer.
Further, the trustee’s sister then being added as a beneficiary, also may well amount to a transfer of interest in the trust estate, again dutiable. Fortunately, the appointment of the trustee’s sister under the Deed of Variation of Trust was not valid as the trustee was not a party to the Deed. With millions of dollars of dutiable property in the trust, stamp duty would be very significant as would be the unpaid tax interest, given the documents are still unstamped.
Last we heard the matter was still being resolved but the accountant is looking down the barrel of an expensive claim on his insurance.
It could have been avoided
The trust deed was a discretionary trust. Apart from when the trust is wound up where no beneficiaries are nominated to take the capital of the estate, the beneficiaries only have a “right to be considered” for a distribution. The trustee could simply have ensured that the resolution for distribution of trust income each financial year (and upon winding up of the trust, any resolution regarding the vesting of the trust fund) provides that the sister’s ex-spouse receives nothing.
None of what was done was necessary and no stamp duty problems or tax issues would have arisen.
It is important that trust variations are documented correctly and all potential consequences (including tax, stamp duty and stamp duty exemptions) are investigated.
We often work in conjunction with accountants and financial planners advising on and documenting trust variations, to ensure the best taxation and legal outcome and that the advisors do not end up with nasty problems like this unfortunate accountant.