Wednesday, January 13, 2010

Careful about changing a Discretionary Trust, Hybrid Trust — even just changing trustee

Christopher Balmford, MD

Any change to a discretionary (family) trust, or to a hybrid trust, requires careful consideration to make sure the change will not involve any ending of the trust or creation of a new trust out of the existing trust. These sorts of changes are often called a "resettlement of the trust".

Why is a resettlement risky?
Any ending of a trust, and any creation of a trust out of an existing trust, can cause trust property to be disposed of and acquired — which has tax and stamp duty implications.
Although changes can be made to discretionary trusts and to hybrid trusts, they need to be carefully thought through on the basis of sound legal advice.

Changing a trustee of a discretionary trust
As the ATO says in a useful paper about changing a discretionary trust (see and the links in the box on the right-hand side of that page):
"A change of trustee does not in itself result in a termination of the trust. If there is merely a change of trustee, the trust property with the accompanying equitable duties are assumed by the new trustee and the trust estate continues unchanged. On the other hand, a change in the trustee or control of the trustee may be an element in arrangements which in their entirety amount to the creation of a new trust."

It's the "On the other hand . . ." that we all need to be careful about. So we are.

Cleardocs and changing a trust
Several times a day, the Cleardocs helpline rings with someone — perhaps, a trustee, a beneficiary, or a professional advisor — asking about a change they want to make to a trust. Often they want to change the trustee(s) of a discretionary trust, but sometimes the change is more complicated.

Due to the risks involved (even in changing trustee, or just changing the control of a corporate trustee), we refer all these customers to the free legal helpline at Maddocks, which we arrange for our customers. As part of the free legal helpline, the lawyers at Maddocks explain the risks and what's involved in making any changes that are safe to make — and how to make them safely.

If our customer decides to make the change to the trust, then Maddocks can prepare the relevant documents. But this work is not part of the free legal helpline. So Maddocks charges for this work in the usual way. Maddocks always give a quote first — also, because the firm handles so many of these calls, it has developed an efficient system which helps to keep costs down. If the relevant Trust was set up on Cleardocs, then — because the firm's lawyers know our deed so well — the firm's fee is usually lower than if the trust was set up elsewhere. For an up-to-date quote, call Cleardocs on 1300 307 343 and we will arrange for you to speak with one of the lawyers at Maddocks.

(By the way, changing the trustee of a Self-Managed Superannuation Fund is a much simpler and less risky activity — which is why we have an online document package "Change of Trustee" for SMSF, see As much as we'd like to have a document package to change the trustee for a Discretionary Trust, we can't. Most of our customers are pretty understanding about this — indeed, they appreciate our "safety first" approach.

What are the risky changes?
The ATO points out (in the paper mentioned above) that many changes to a trust — even though they may not actually create a new trust (and so may be safe) — "raise the question of whether a new trust has been created". The changes to be careful of include any one or more of the following (this is a slightly reworked version of the ATO's list):
  • any change in beneficial interests in the trust's property;
  • creating a new class of beneficial interest;
  • altering an existing class of beneficial interest;
  • redefining a beneficiary class;
  • changing the terms of the trust — that is, changing the deed;
  • changing the rights or obligations of the trustee;
  • changing the nature, or features, of trust property;
  • adding property which could amount to a new and separate settlement;
  • depleting the trust property;
  • changing the termination date of the trust;
  • changing the trust in a way that is not contemplated by the terms of the original trust;
  • changing the essential nature and purpose of the trust;
  • converting a discretionary trust to a unit trust;
  • merging two or more trusts;
  • splitting a trust into two or more trusts.
FAQs about Discretionary Trusts
For FAQs and answers about Discretionary trusts, see:

Set up a Trust: Discretionary Trust, or Unit Trust - Fixed, or Unit Trust - Non-fixed, or Hybrid Trust
You can set up a range of trusts online at

Any questions?
If you have questions:
  • about how to use Cleardocs, contact the Cleardocs helpline on 1300 307 343.
  • about legal issues, contact the Cleardocs helpline on 1300 307 343. If you need advice, we can arrange for you to speak with a lawyer at Maddocks. The firm provides a free legal helpline in relation to the documents Cleardocs provides. If you require other legal advice in relation to your particular circumstances, then this will be charged for.

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