It is very common for trust deeds to be misplaced. Clients do not seem to appreciate the significance of the trust deed and the process which should be followed if a trust deed is lost.
Simply adopting the terms of a replacement deed as constituting the terms of the trust without any investigation to try to find the misplaced deed or to find out the actual terms of the lost trust deed is very problematic.
Recent experience has shown that simply submitting a replacement deed to the Office of State Revenue can lead to a request for a valuation of the trust assets and the imposition of full stamp duty at conveyance rates of duty on the gross value of the underlying dutiable property owned by the trust.
What can be done?
In a recent NSW decision of Porlock Pty Ltd (2015) NSWSC1243 per Young AJA, a fairly novel approach was taken under the terms of Section 63 of The Trustee Act 1925 to seek judicial advice.
In that case the plaintiff was the trustee of a trust known as the JDB Carr Trust Number 2. It was established in 1957. It was not known who the settlor was but the trust had substantial assets.
Nobody could find a final copy of the trust deed.
The question put to the court was whether the trustee would be justified in dealing with the trust property in a way in which it proposed.
What is referred to and known as secondary evidence was put into affidavit as the terms of the trust.
This was constituted by the content of a letter which had been drafted by the accountant when the trust was first established. The letter set out the basic terms of the trust.
It provided that the income derived from the trust was to be paid to a certain person during his life and after the death of that person was to be held as to both capital and income for his children living as at the date of his death or attaining the age of 21 if more than one as equal shares as tenants in common.
Affidavits were sworn that the letter accurately set out the terms of the trust.
Evidence was lead that the deed establishing the trust was stored in a particular place at the accountant’s office until the accountant’s retirement in 1985.
The plaintiff’s solicitors lead evidence of searches made for the trust deed without any success.
In his judgement His Honour Mr Young AJA held as that there was secondary evidence and that this was an application for judicial advice and that the deed actually existed, it followed that he could hold that the plaintiff did not hold the property beneficially but on the terms of trusts as set out in the letter from the accountant and the Trustees would be justified in acting on it (that is, on the terms of the letter as constituting the terms of the trust).
Accordingly orders were made pursuant to Section 63 of The Trustee Act that the plaintiff was justified managing and administering the terms of the family trust pursuant to the terms of the accountant’s letter.
The procedure involved in undertaking these cases is complex.
It involves the filing of a summons after the making of extensive inquiries to locate the deed and then the filing of affidavit evidence setting out all of the steps undertaken to locate the deed.
There would need to be some evidence which would need to be of a secondary nature as to the terms of the trust in order to justify and ground the orders seeking judicial advice confirming the management and administration of the trust in a particular manner.
These searches should include enquiries of the commercial provider (if the deed was secured from a commercial provider) to determine what would have been the terms of the trust at the time that the trust was established and/or as a minimum evidence from the persons establishing the trust including the settlor or the accountants as to the basic terms of the trust.
Of course all of this can be avoided if additional copies of the deed are kept once the deed is constituted.
The use of facilities such as Virtual Cabinet or other software programs to store these vital documents is one solution. Using a client portal would also provide a means to place a copy in a secure online location which the client could access at any time.
PDF copies of the deed should also be stored by the client and the accountant (or the lawyer if a lawyer was involved in the establishment of the trust) to ensure more than one copy is kept. A secure portal would provide anytime access to all parties.
Simply submitting a replacement deed to the Office of State Revenue without doing anything more can result in stamp duty being imposed on the deed on the value of the trust assets – the unencumbered value – and this can be a significant impost.
If the trust has real estate worth $1million in value, this can amount to a sum in excess of $40,000.00.
Better to be prepared.
The legal establishment of the trust
It is becoming increasingly common for banks and financiers to require certification from a lawyer that a trust has been properly constituted at law.
On nearly every single occasion that the writer has been asked to give such a certificate, there has been a problem which has needed to be rectified.
A trust, at law, has to have a number of elements to be properly established.
These are as follows:
- There must be a trustee – this of course can be an individual or individuals or a corporation;
- There must be trust property accepted on the terms of the trust – this is evidenced by the trustee receiving the settlement sum from the Settlor establishing the trust and then banking the settlement sum into the trust bank account or stapling cash to the deed.
- There must be a trust “obligation” – this is shown by the terms of the deed. The obligations, in turn are for the benefit of the beneficiaries and
- There must be beneficiaries readily ascertainable. This is well provided for within the Reckon deeds as the classes of beneficiaries are well defined.
Most of the issues that have been experienced are problems with issue (2).
The usual matters which are picked up are the following:
- There has been no payment – at all – of the settlement sum by the settlor to the Trustee. Until that occurs, the trust, legally, does not exist.
- The money has not come from the actual settlor but from a beneficiary – again, this can result in the trust either being revocable for trust purposes or being a sham;
- The deed simply has not been signed correctly – examples are trustees witnessing each other’s signatures, listing a settlor that is fictitious, omitting an officeholders signature from a trustee company or incorrectly referring to a person by a nickname or maiden name, to name a few.
- The deed has been signed at a time before the trustee corporation actually existed – i.e before it was incorporated.
It is worth the effort to ensure the trust is properly constituted and all the minutes are correctly completed.
The Reckon Docs package of documents sold to you contains all the relevant documents you need to establish the trust and to provide an audit trail and evidence of all relevant steps having been undertaken. The Virtual Cabinet portal gives you the means to safely share these documents with your client online. The contracts can even be signed electronically.
Clients should also ensure that the deeds are stamped as required from state to state by the relevant offices of state revenue. Relevant information concerning the duty imposed in each state is contained within the folder of documents supplied.
It's common for trust deeds to be misplaced.