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High Court Decision on Trust Capital Distribution Could Provide Opportunities for Asset Planning

trust deeds

The High Court recently considered whether a trustee can make a distribution of capital to beneficiaries from what’s known as an asset revaluation reserve.  The case in question was Fischer v Nemske Pty Ltd.

The result of this decision could present opportunities across wealth planning, family law property distributions, separating individuals or groups out of a trust and succession planning.

The background

The assets of the Nemes Family Trust consisted only of shares in a company.  In 1994 the trustee revalued those shares to around $3.9 million and credited that value to an asset revaluation reserve.

The trustee then resolved to make a distribution out of the asset revaluation reserve to Mr and Mrs Nemes (two of the specified beneficiaries of the trust).

The Nemes were not paid the $3.9 million but it was credited to them in the trust’s accounts and the trustee granted a charge over the shares in favour of the Nemes to secure payment of the amount.

Mrs Nemes died in 2010 and Mr Nemes not long after in 2011 leaving control of the trust to the Fischers and the residuary of his estate to other beneficiaries.

But was the distribution effective?

For the Fischers this was a $3.9 million dollar question.  If the distribution was effective then the estate of Mr Nemes would receive the actual distribution of the wealth in question while if it was ineffective it would remain in the trust and come under the control of the Fischers.

The High Court held (by a majority of just three to two) that the creation of a revaluation reserve and subsequent distribution were in fact effective and so the trustee owed $3.9 million to Mr Nemes’ estate.

Critical to the majority’s decision was that the trust deed gave the trustee the power to “advance” capital to beneficiaries.  

Chief Justice French made the point that there is a distinction between “pay”, “supply” and “advancement” and that an advance in particular need not result in the actual distribution of property or capital.  It can allow for the creation of a debt to be satisfied out of the trust property at a later date – as was the case here.

Opportunities?

While this case has not created a general principle and the number of dissenting judgments is noteworthy, there are a number of potential opportunities for applying this approach with trust distributions.  For example:

  • In circumstances where the trust deed allows for it, when attempting to transfer trust property from one generation to another, or from one branch of the family to another,  this method could be employed, without incurring a CGT and enabling the trust to borrow money against the assets of the trust to pay out a beneficiary.
  • In a family law property distribution where the parties agree that a trust should be preserved, with its capital assets intact, but a distribution needs to be made in favour of a beneficiary.
  • As a succession planning process which is only activated at the point at which the beneficiary dies and their estate seeks actual payment of a distribution owing.

Don’t jump the gun

It’s important to remember that this approach may not work in every situation and certainly not with every trust deed.

The content, terminology and powers of the trust deed will determine whether an asset revaluation reserve is possible in the first place and secondly whether an “advancement” can be made in such a way as to match the facts in this decision.  It may be necessary to amend the trust deed to permit such a transaction in appropriate circumstances.

Questions?

This is a relatively complex area of law but could provide significant benefits to accountants, financial planners or individuals who are struggling to provide a solution to problems similar to these.

If you have any questions regarding this case or how an asset revaluation reserve and subsequent distribution may assist in your particular situation please contact us.

If you have any questions regarding this case or how an asset revaluation reserve and subsequent distribution may assist in your particular situation please contact us.