TalkTax

Trusts can provide excellent inter-generational asset protection. However, when relationships break up assets in trust solution (rightly or wrongly – I’ll leave that analysis for another day) are often taken into account. The equal sharing principle of the Property (Relationship) Act 1976 is pretty much standard modus operandi now and accordingly, or despite, many parties fail to appreciate or understand the advantages and limitations imposed when trusts are involved.

One tack taken by some parties is to utilsise powers of removal so that one partner / spouse is removed as both a trustee and beneficiary. One party retains powers of appointment and a beneficial interest in assets in trust, the other takes on other relationship property assets. While this approach may seem “fair” vis-à-vis the former relationship parties (and ignoring any of the multiple trust related issues that can arise – including but not limited to future claims from the other beneficiaries) care is required in the execution to avoid an unexpected tax impost.

Where, removing a former spouse or partner involves alteration to the class of final beneficiaries it is important to consider whether rather than amending a class of beneficiaries there has actually been a fundamental variation (or to put it another way an alteration to the trust’s sub stratum) such that a new trust has been resulted (effectively a resettlement of the trust’s assets onto a new trust for new objects). If this is the case and the trust’s sole asset is the (former) family home, from a tax perspective, likely no issue. However, if the trust owns property in the tax base, for example property where depreciation has been claimed, the result can be an unexpected tax liability. Further, exceptions from tax provisions that apply to property transferred pursuant to a relationship property agreement will not apply to any transfers from a trust (including a transfer that arises from a resettlement).