Missing the vesting date of your trust can have serious tax and trust law implications.
What is the Vesting Date?
The vesting date is the date upon which the trust will end, and in almost all cases this date is specified in the trust deed.
You cannot change the vesting date of a trust after that date has passed. Generally the vesting date can be extended prior to it being reached without adverse consequences, however:
- it cannot be extended to a date that is more than 80 years from the date the trust commenced;
- the trust deed must allow the extension: you must ensure the terms of the trust deed are complied with in the event you change the vesting date (whether by an express power to bring forward the vesting date where the default vesting date is 80 years; and
- the vesting date may be an essential feature of the trust, in which case varying it should be carefully considered in case doing so will give rise to ‘resettlement’ issues.
What Happens on the Vesting Date?
The relevant beneficiaries become absolutely entitled to the property of the trust: that is, the interests in the trust property become fixed and vested in the relevant beneficiaries.
The powers of the trustee change when the trust vests. For instance, in the case of discretionary trusts the trustee loses its discretion to distribute income or capital of the trust and the relevant beneficiary can call for its fixed entitlement to be paid.
Why does the Vesting Date matter?
Vesting of a trust may create capital gains tax (CGT) and income tax obligations. There are a number of CGT events that may occur and income tax implications that may arise and these include:
- if the trustee and the relevant beneficiaries (who on vesting have a fixed interest) agree that the trust assets will be managed as if the trust has not vested, then this may amount to CGT event E1, whereby a new trust is created over the trust assets starting from the vesting date; and
- if the assets vest in a single beneficiary on the vesting date, then CGT event E5 happens when the beneficiary becomes absolutely entitled to the trust asset as against the trustee.
You should seek advice from us on whether the vesting of your trust will have CGT or income tax consequences. The tax implications will depend on the terms of your trust deed.
If you need help in this regard, please contact one of our lawyers.
Please contact The Quinn Group on (02) 9223 9166 or submit an online enquiry.