Trust Vesting and the End of a Trust

Most trusts cannot continue indefinitely. The deed sets a vesting day, and on that day the trustee's discretions come to an end and the trust property becomes held for whoever the deed says takes it. Vesting is not an event the trustee chooses to recognise. It happens because the date arrives.

For most Victorian trusts the deed fixes a period of up to eighty years, so vesting is rarely imminent. It is, however, a fixed date with consequences that cannot be reversed, and for trusts established decades ago it now sits inside the planning horizon of the people who control them. Deeds also vary: some use a shorter period, some use an older common law formula, and some have had the date altered by a variation. The date that matters is the one in your deed, not the one people assume.

The rule is not the same everywhere. South Australia has abolished it. Under the Law of Property Act 1936 (SA), a trust governed by South Australian law does not need a vesting day at all, and it can accumulate income rather than having to distribute it. That is why some trusts are set up under South Australian law in the first place.

It is not a complete answer. Someone with an interest in the trust property can still ask the Court to have it vested. And what governs a trust is the law the deed chooses, not the State the family lives in, so it still comes down to reading the deed.

What happens on vesting

On the vesting day the interests of the beneficiaries become fixed in accordance with the deed. In a discretionary trust that usually means the property is held for a class of takers on default, often specified in a schedule that nobody has looked at since establishment. The trustee's discretion to decide who benefits is gone.

The consequences are practical as well as legal:

• the flexibility that was the point of the trust ends
• the assets become held for identified people in fixed shares, which may not be the shares the family would choose
• a capital gains tax event arises in relation to the trust assets
• where the trust holds land, the position under the duty legislation must be considered
• the trustee must actually administer the trust on the new footing, including distributing or holding as bare trustee

The tax consequence is the reason to act early

Vesting is a taxing point. Beneficiaries becoming absolutely entitled to trust assets can crystallise gains that have accrued over the whole life of the trust, with no cash having changed hands to fund the liability. For a trust holding appreciated land or a business, that is a significant exposure arriving on a fixed date.

The position cannot be repaired after the event. Once a trust has vested, the trustee cannot undo it by resolving to carry on as before, and continuing to administer the trust as though it were still discretionary does not change what happened in law.

Can the vesting date be extended?

Sometimes. Whether a vesting date can be brought forward or extended depends on the amendment power in the deed and on the rule against perpetuities as it applies to that trust. Some deeds permit the trustee to nominate an earlier date but not a later one. Some permit extension within the original perpetuity period but no further. Some do not permit any change at all.

Where the deed does not allow an extension, the remaining options may include an application to the Court, or accepting that the trust will vest and planning for the consequences in advance. Both are better addressed years ahead than months.

The worst outcome is discovering the vesting date after it has passed. The second worst is discovering it three months before.

What we do

• Confirm the governing law of the deed and the vesting date, including any variation that has touched either.
• Identify the takers on default, which is often the part that surprises the family.
• Advise whether the deed permits the date to be changed, and on what conditions.
• Advise on the capital gains tax and duty consequences of vesting, and on the timing options.
• Prepare the variation, the trustee resolutions, or the plan for an orderly vesting.

Where the trust forms part of a wider estate plan, the vesting date needs to be read together with the succession arrangements for control of the trust.

This page is general information. It is not legal or tax advice, and the terms of your particular deed will change the answer.