Legal Tip 340: What Happens if a Trust Ends and Title isn’t Transferred?

Trusts must come to an end. This will be due to the terms of the deed or will or due to the laws against perpetuities. Sometimes this will happen and title isn’t transferred.



Example

Homer’s dad sets up a testamentary trust in his will. The will leaves an investment property upon a short term testamentary discretionary trust. The income of the trust can go to any of Homer’s children, but upon Bart reaching the age of 26 the trust vests and Bart will become absolutely entitled to the house.


Bart was young when his grandfather died and he doesn’t realise that on his birthday next week he will be entitled to the property. Homer forgets about the details and Bart’s 26th birthday comes and goes. Homer remains the legal owner of the property.



In this situation on Bart’s birthday Homer changes from being the trustee of a discretionary trust to the trustee of a Bare trust. It is Bart that is now the sole beneficial owner of the property. The trustee can no longer distribute income to Bart’s 2 sisters. Homer doesn’t realise and does distribute the income equally.

From a tax point of view Bart would be the one assessed on all of the income from the property. From a legal point of view Homer has committed a breach of trust and must account to Bart for the income he hasn’t received.

If Bart becomes Bankrupt the property would be available to creditors. If Bart died the property would pass via instructions in Bart’s will or via the intestacy laws.

On this see

Legal Tip 335: Death, Beneficial Ownership and Inheritance Legal Tip 335: Death, Beneficial Ownership and Inheritance

 

So a few alternatives might be:
Dont force the tt to vest?
Use a corporate trustee (have to at least pay for it every year as a reminder)?
Educate the beneficiaries?

 

Sometimes you have no choice
- vesting date in the will
- laws against perpetuities

The type of trustee won't change anything

they should know it is coming so they can plan - and perhaps try to extend the vesting date.

 

@Terry_w - great topic on TT & vesting.

If the terms of the TT were different - eg trust vested to Bart & his sisters when the youngest turns 26, what would happen if Bart died prior to vesting or before Maggie turned 26?

 

That would depend on the terms of the will. Usually they won't get it unless Alice at that date and someone else will

 

If the TT deed vests at Barts 26th bday then amending to extend the vesting date (and change benefical interest) may have a CGT consequence. Potentially a trust resettlement. Depends on the terms of that trust. Such a deed may have powers that allow Homer as trustee to consider vesting on that date OR extending the term of the trust etc which may have been more effective clauses than an impose vesting. Imposed vesting dates can be a problem if Bart changes and goes from being a happy content little kid to now being someone married to a spouse who is seeking divorce due to his gambling and drug and alcohol issues. Homer having powers to safeguard trust property until Bart cleans up his act may be more powerful for protection. Amending could pose a concern. You may have a new trust and a CGT event anyway.

Costly legal advice will be preliminary.