Do family trusts live forever?

They 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 Trust.

Trusts do not have an indefinite life

There is however a twist to them that whilst known by all at that time who were involved in the establishment of them, has not really hit home until the last few years.

That is, Family Trusts do not have an indefinite life and their life is limited by an old rule known 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 amongst some investors and their professional advisors.

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 issue and the increasing trend over the last 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 South Australia to avoid this issue and so that there is no expiration date for the Family Trust, or is there some simple way to say amend the Trust documentation to extend its life.

The law is clear on the second question and it is not possible to extend the perpetuity date on an existing Trust by varying the Trust documentation.

That deals with that issue then.

There are two professional streams of opinion out there in the market place about the ability and effectiveness of setting up Trusts in South Australia 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 South Australia, then this will see the establishment of a legal Trust in South Australia which can then be utilised throughout the country without any concern about its expiration.

The contrary opinions are those Tax and Trust Advisors who maintain that setting up Trusts in South Australia 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 are property in Queensland then the opinion is that Queensland law applies and the rule of perpetuities is still an issue despite the attempts to say that the laws of South Australia 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 they 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 amongst the professionals believe that that is 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 United Kingdom resolving this issue.

So what does this all mean to you as an investor?

Well, if you have an existing Trust there is nothing you can do to alter the expiration date so you are stuck with it. Would you setup any new Trust in South Australia.

That is a matter you will need to take your own professional advice on, but the feedback I received from many investors is that they will “just wait and see”.

The first thing to remember is that we are talking here about Family Trusts.

That is, they are designed for use primarily for families.

I think it is all very well to look at setting up Family Trusts that “live forever” if you are talking about the big family names in Australia.

My experience though with Family Trusts is that once mum and dad pass on, in most cases the family sell the assets off to share amongst themselves and then wind up the Trust.

I don’t see, from where I sit, many families continuing on with Trusts set up by their parents.

In fact when I talk to my investor clients about it and ask them whether they want to set up a Trust in South Australia so that it lives forever, the response I usually get is something like “Mate, I don’t really care. I will be gone by then”.

As this is a typical response, I don’t see therefore that it is all that relevant to my client base.

But who knows. Watch this space.