Family trusts have been around for centuries but really hit their straps some 35 years ago when John Howard as Federal Treasurer under Prime Minister Malcolm Fraser stated that the government of the day accepted them as a legitimate means and “vehicle” for the carrying on of a business or investment purposes.
There had been a lot of conjecture at the time about whether family trusts had much more life in them.
The number and use of them around Australia for investment purposes has grown since that time.
The words of confidence from our then Treasurer gave a lot of baby boomers confidence to establish such a trust.
There is, however, a twist to them that while know by all who were involved in the establishment of them at that time, hasn’t really hit home until the past few years.
That is, family trusts don’t have an indefinite life and their life is limited by an old rule knows as the ‘rule against perpetuities’.
In a nutshell this rule means that trusts can’t live forever, hence the reason that most trusts that have been established have a life of 80 years.
Many of the trusts established by baby boomers then are now halfway through that life and in recent years there has developed a dialogue about this limitation which is now becoming a source of some angst among some investors and their professional advisers.
The end game for the use of those trusts is now starting to loom on the horizon.
What does this mean then for the controllers of those trusts when the final whistle blows on their life?
It means that on the 80th year those trusts will vest.
That is, collapse and the beneficiaries of the trust become the owners of the assets.
This occasion will be deemed in many cases to be a capital gains tax event and/or GST event, triggering the payment of what could literally be multi-billions of dollars to the Federal Government.
Hence the reason for the growing anxiety in the investment world and professional circles about this issues and the increasing trend over the past few years for people to establish their family trusts in South Australia where no such rule of perpetuities applies.
So, should we all now be establishing any new family trust in SA to avoid this issue and so that there’s no expiration date for the family trust, or is there some simple way to amend the trust documentation to extend its life?
The law is clear on the second question and it isn’t possible to extend the perpetuity date on an existing trust by varying the trust documentation.
There are two professional streams of opinion in the marketplace about the ability and effectiveness of setting up trusts in SA to circumvent this issue.
The first body of professional opinion is that, provided the trust documentation states that the laws of South Australia apply to the trust and the trustee is, say, a company which has a registered office in SA, then this will see the establishment of a legal trust in SA which can then be utilised throughout the country without any concern about its expiration.
The contrary opinions are those tax and trust advisers who maintain that setting up trusts in SA is just problematic.
That is, it doesn’t matter what the trust documentation says about which state laws apply, the law that applies is the law of the state that has the greatest connection to the trust assets.
Essentially then, where are the trust assets?
If they’re property in Queensland, then the opinion is that the Queensland law applies and the rule of perpetuities is still an issue despite the attempts to say that the laws of SA apply to the trust.
Has this problem occurred elsewhere in the world?
Yes it has.
The United Kingdom faced it not that many years ago and resolved it by simply passing legislation to extend the dates of family trusts by another 30 years and therefore effectively moving the issue onto another generation.
Can that happen here?
Yes it can.
Each state has the power to implement laws to its parliament dealing with this issue.
The cynics among the professionals believe that’s exactly what will happen.
Once the end date looms larger, then the states won’t want the Feds picking up this massive windfall of revenue without them sharing in it, and will simply pass legislation as they did in the UK resolving this issue.
So what does this all man to you as an investor?
Well, if you have an existing trust, there’s nothing you can do to alter the expiration date so you’re stuck with it.
Would you set up any new trust in SA?
That’s a matter you’ll need to take professional advice on.
My experience with family trusts is that once mum and dad pass on, in most cases the family sells the assets off, divides the profits and then winds up the trust.