3. Trusts


Australian trust law is a separate body of law within each of the six states and two territories of the Commonwealth.

a. Most frequently used trusts

There are three categories of trusts. Their categorisation is determined by the manner of their creation. These are express trusts, resulting trusts and constructive trusts. Express trusts are created either for named persons (or entities, or classes of person or entity) or for stated purposes such as charitable purposes. Since the early 1970s, express trusts have been the most common type of trust used. Discretionary trusts and fixed trusts are the usual forms of express trust. The unit trust is, in turn, the most frequent form of fixed trust employed. Since the early 1990s, the hybrid trust, another type of express trust that has characteristics of both a unit trust and a discretionary trust, has become prominent in certain areas of trust practice.

A hybrid trust usually takes the form of a standard unit trust until vesting of the trust property in the beneficiaries, at which time all or part of the trust income is paid proportionately to the unit holders as a fixed income share entitlement. Usually, unit holders are entitled to return of paid up capital on vesting of the trust, which is effective dissolution of the trust. Also, accretions to the corpus, owing to unrealised capital gains accruing before the vesting day or accumulation of undistributed income, are appointed by the trustee in the trustee’s discretion to one or more discretionary objects of the power of appointment of the corpus of the trust.

b. Governing law

In the case of testamentary trusts, there is a rebuttable presumption in favour of the lex domicilii of the testator. In the case of inter vivos trusts, the choice of law depends on whether the trust is of real property or movables.

In the case of a trust of movables, the proper law of settlement is the law intended by the settlor and trustee to govern all matters. This intention is either expressed in the trust instrument or gleaned from the subject matter of the trust and the circumstances surrounding its creation. The validity of a trust and the choice of proper law must be made as at the date of creation of the trust.

The courts will choose the system of law with which, on an objective assessment, the trust has its closest and most real connection. This selection considers factors such as situs of trust property at the date of creation of the trust, residence of the settlor, residence of trustee(s), and any choice of law made for purposes other than determining the validity of the trust, such as choice of law for determining matters associated with the administration of the trust.

Where a trust comprises property that is only immovables, such as land and leasehold interests in land, the proper law of the trust is the lex situs of the trust property. Although authorities on this point are not unanimous, most authorities suggest that the proper law of trusts of mixed trust property, comprising both movables and immovables, is the lex situs of the immovable trust property.

Australia ratified the Hague Convention Abolishing the Requirement of Legalisation for Foreign Public Documents, which came into force in Australia on 6 March 1995. Australia is also a member of the Hague Conference that created the Hague Convention on Private International Law, and recognises foreign judgments that are executed in Australia in accordance with the terms of that Convention.

Australia is a signatory to the Hague Convention on the Law Applicable to Succession to the Estates of Deceased Persons (1989) and the Hague Convention on the Law Applicable to Trusts and on their Recognition (1991) and has enacted the Trusts (Hague Convention) Act 1991 to implement the latter within Australia.

c. Creation of a trust

i. Valid constitution

All Australian states and territories rely on English trust law principles for ascertaining requirements for the valid constitution of a trust, which has four essential requirements: trustee, beneficiary (also called a cestui que trust), trust property and trust obligation.

Express trusts over real property must be in writing in order to be enforceable, although where the trust is not evidenced in writing, the trust will be enforced as a resulting trust where it is established that the beneficiary provided the source of funds for trustee acquisition of the trust property.

Express trusts over personal property are enforceable, whether or not made in writing.

Express trusts created inter vivos are ordinarily created by settlement of a nominal sum of money. Additions to trust property are then made by either transferring property in specie to the trustee, thus attracting a stamp-duty liability where the property acquired is dutiable property for stamp-duty purposes, or providing the trustee with funds to acquire the property for the trust, which will also attract a stamp-duty liability where the property acquired is dutiable property for stamp-duty purposes.

Testamentary trusts created by will or codicil usually involve gifting of property directly to the trustee and rarely involve the settlement of a nominal sum of money on the trustee with provision for additional estate property to be transferred to the trust at a later date. The reason for this is that transfer of property to the trustee of a testamentary trust by a deceased person in that person’s will or codicil is stamp-duty exempt, whereas post-death transfers of property, from a trust under a will to a post-death testamentary trust, attract stamp duty liability where the property acquired is dutiable property.

ii. Duration and termination 

The duration of a trust is limited in all jurisdictions in Australia, except South Australia, by the common-law rule against perpetuities or remoteness of vesting, modified by statute to allow a settlor to select a period not exceeding 80 years instead. This rule has been abolished in South Australia. Generally speaking, the death of an income beneficiary or the coming of age of a beneficiary limits the term of most trusts. Charitable trusts are not subject to this rule and can continue indefinitely.

There is generally no restriction on the period allowed for accumulation of income in most jurisdictions, other than those that relate to perpetuities.

A trust is terminated by any of the following methods:

  • pursuant to a termination clause in the trust instrument
  • at the request of all the beneficiaries who are all of full capacity and who represent the entire beneficial interest – the rule in Saunders v Vautier
  • by order of the court, or
  • in accordance with the terms of the trust (e.g. the death of the income beneficiary or coming of age of a beneficiary, or other vesting circumstance or date).

iii. Beneficiaries

Basic common law and equitable proprietary rights are available to all beneficiaries, other than those of a discretionary trust. Depending on the class of the beneficiary, that beneficiary has a beneficial ownership in the subject matter of that beneficiary’s interest. Normal rules of consent, concurrence, release, acquiescence, and laches apply in all jurisdictions. There are statutory restrictions on the ability of trustees to make advancements to beneficiaries. The trustee must take into account the needs and circumstances of all beneficiaries in order to act prudently.

iv. Trustees

Trustees are appointed pursuant to the trust instrument, under statutory powers of the relevant trustee legislation, or by the court. Trustees are discharged by one of the same three methods. A person appointed as trustee may disclaim the trust but must do so before taking any step in respect of the trust.

Powers of trustees are conferred from the same three sources. The practice is to provide trustees with the broadest set of powers possible. The duties are the standard common law duties.

A trustee is liable for any breach of trust, whether it is active or passive. If the breach results in a loss for the trust, the trustee is personally liable. The trustee has a right of indemnity to be reimbursed from the trust funds for monies expended and liabilities incurred on behalf of the trust.

Generally, the equitable rule applies that a trustee cannot be remunerated for carrying out the role of trustee. Nonetheless, the trust instrument can provide for such remuneration, or the trustee can come to an agreement with beneficiaries of full age and capacity that the trustee be paid, or the court can order that the trustee receive remuneration.

v. Protectors

The role of ‘protector’ is relatively uncommon in Australian jurisdictions, although within the terms of the trust agreement there can be the role of ‘appointor’ or of an ‘advisory committee’, which attempt in varying degrees to fetter the trustees in the exercise of their role, duties, and powers. Unless there is a specific direction that a trustee must heed the direction of a third party, a trustee is free to exercise discretion unfettered.

vi. Role of public trustee or guardian

All jurisdictions have created a public trustee (‘state trustee’, in Victoria), who acts as executor and trustee, fulfils a variety of public functions (such as trustee of last resort and executor of small estates) and has responsibility for unclaimed monies. The public trustee had a traditional role in managing the affairs of people unable to manage their own financial affairs because of mental or severe physical disability. This role has now been reduced because it has been extended to private trustee companies.

Each jurisdiction has established some form of statutory guardianship and administration board or tribunal (e.g. the Office of Protective Commissioner, in New South Wales). The function of these bodies is to protect the interests of people who are unable to manage their own affairs because of mental or severe physical disability. Also, the boards oversee the conduct of attorneys under enduring powers of attorney. They are responsible for the appointment of guardians to administer lifestyle issues on behalf of such people.

d. Trust administration

i. General management

It is the fundamental duty of a trustee to adhere rigidly to the terms of the trust. The management of the trust must be conducted with the understanding that a beneficiary may compel performance of the trust or approach the court for determination of questions of construction and administration.

For trustees of deceased estates, regard must be taken of not only the relevant trustee legislation in each state but also the relevant property law statutes in each state that controls devolution of real property by testamentary succession.

A trustee is under a positive duty to preserve trust property, and against this duty must resonate the trustee’s power to invest, duty to carry on business, if relevant, and hold trust property for the relevant beneficiaries, either immediately or in succession.

ii. Distributions from trusts

While the general position prevails that a trustee is under an absolute duty to pay and transfer the trust property to the person properly entitled to it, there are exceptions that allow waste or diminution of trust property and assist in the discovery and ascertainment of claims on the trust property.

Provisions exist in each state for the protection of trustees when distributing trust property after advertising for claims. Trustees must act impartially between beneficiaries, particularly in the apportionment of income and capital across the interests of life tenants and remaindermen.

In administering a discretionary trust, there must first be certainty of identification of the relevant beneficiary before distribution is undertaken. Modern trust deeds normally used in Australia contain provisions that assure this result.

iii. Change of administrators

Trustees are under a duty to act personally in administration of the trust. Nonetheless, the duty of a trustee not to delegate duties or powers has allowed some separation between management and administration of the trust, particularly in relation to out-of-jurisdiction assets, employment of agents and attorneys and undertakings of purely ministerial acts. For example, in Trustee Act NSW 1925 a trustee has express powers to change certain administrators of trust property, subject to the trust instrument.

Succession of trustees is usually prescribed by the trust instrument itself and is otherwise under supervision of the court. The creation of guardians or appointors to the trust may require the agreement to a change of trustee. The trust instrument may also prescribe other controls to the change of administration of the trust.

iv. Passing of accounts

The trustee of a testamentary estate is under a duty to account to the court, at election of the court, the trustee or on application by a beneficiary. This accountability derives from appointment of executors and trustees as a result of the grant of probate by the court. In an inter vivos trust, a duty of the trustee is to account to the beneficiary, requiring adherence to the duty to keep and render proper accounts. The scope of this duty to keep accounts is normally set out in the trust instrument. The requirements of a trustee to file tax returns require the trustee to adhere to the record-keeping and reporting requirements of the Australian taxation office.

In all states other than South Australia, the relevant trustee legislation provides that a trustee may unilaterally have an audit taken of the trust by a person carrying on the business of an accountant and, in so doing, render certainty in the form and substance of the accounts of the trust.

v. Variation of a trust 

The court has no inherent power to vary the terms of a trust. Variation of the terms of a trust may be authorised by the trust instrument, beneficiaries, statute or the court. Any proposed variation of a trust should be assessed by the trustee for stamp duty, goods and services tax (GST), or capital gains tax (CGT) consequences, so that any impact of the change on the extent of trust property may be assessed and appropriate authorisations sought.

e. Confidentiality and disclosure

Trustees are accountable to beneficiaries for adherence to and performance of the terms of the trust. The trustee is under a positive obligation to inform a beneficiary of the amount of the trust property, the mode of investment of the trust property, and the existence and content of trust documents.

© 2012 Society of Trust & Estate Practitioners