TalkTax

Following on from the post on 23 October 2009 regarding tax consequences that can follow on from a variation of trust it is perhaps timely to consider whether something as commonplace as a variation in trust period could effect a fundamental variation.

Deeds of trust commonly contain a power to alter the vesting date

It is common for a trustee to have a power to vary the trust period.  Subject to the terms of the trust a variation of trust period is usually effected by resolution or deed.  However, given how easy it is to vary a trust period (and in the absence of triggers such as transfer documents that can signal the requirement for advice) it is possible to vary a trust period without an appreciation of any tax consequences.

Generally a variation in period will not effect a new trust

Generally, unless the term of a trust is an essential feature of the trust, it is generally accepted that a variation to trust that either brings forward or extends the term of the trust will not of itself result in a new trust (Re Holmden’s Settlement Trusts [1968] 1 All ER 148).

That said, although the position seems clear where a trust period is brought forward, arguably greater care is required when a trust period is extended.  In this regard it is disappointing that this matter was not specifically addressed in Dalziell v Dalziell (2008) 27 FRNZ 276 (a case where the trust period was extended to prevent the realisation of a tax liability where the trustee would not have the ability to meet the tax impost).

Care is required if interests in possession are altered following a variation

In the context of extending the term of a trust it is particularly important to consider the tax consequences where interests would have vested in possession on the now varied termination date. In this context it is possible that circumstances will arise where the extension of the term could amount to a disposal of these reversionary interests with any attendant tax consequences.

Conclusion

As it is common place for trust periods to be varied, given the limited jurisprudence and lack of clear guidelines regarding when a variation will effect a new trust, care is required.