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Missing the vesting date of your trust can have serious tax and trust law implications – it is not a date to be overlooked.
Bridie O'Shannessy, Maddocks Lawyers
The ATO recently released a draft tax ruling on the tax implications of a trust vesting, which provides a timely reminder of the importance of paying attention to a trust’s vesting date.
What is the vesting date?
The vesting date (or termination date) is the date upon which the trust will end, and in almost all cases this date is specified in the trust deed.
You cannot change the vesting date of a trust after that date has passed. Generally the vesting date can be extended prior to it being reached without adverse consequences, however:
- it cannot be extended to a date that is more than 80 years from the date the trust commenced;
- the trust deed must allow the extension: you must ensure the terms of the trust deed are complied with in the event you change the vesting date (whether by an express power to bring forward the vesting date where the default vesting date is 80 years, as with the Cleardocs deed, or by varying the deed); and
- the vesting date may be an essential feature of the trust, in which case varying it should be carefully considered in case doing so will give rise to 'resettlement' issues.
What happens on the vesting date?
On the vesting of a trust the relevant beneficiaries (who are entitled under the terms of the trust deed) become absolutely entitled to the property of the trust: that is, the interests in the trust property become fixed and vested in the relevant beneficiaries.
The powers of the trustee change when the trust vests. For instance, in the case of discretionary trusts the trustee loses its discretion to distribute income or capital of the trust and the relevant beneficiary can call for its fixed entitlement to be paid.
Why does the vesting date matter?
Vesting of a trust may create capital gains tax (CGT) and income tax obligations. You should read the ATO draft tax ruling to understand the types of CGT events that may occur and income tax implications that may arise, these include:
- if the trustee and the relevant beneficiaries (who on vesting have a fixed interest) agree that the trust assets will be managed as if the trust has not vested, then this may amount to CGT event E1, whereby a new trust is created over the trust assets starting from the vesting date; and
- if the assets vest in a single beneficiary on the vesting date, then CGT event E5 happens when the beneficiary becomes absolutely entitled to the trust asset as against the trustee.
Alternatively, seek advice from your accountant on whether the vesting of your trust will have CGT or income tax consequences. The tax implications will depend on the terms of your trust deed.
If the vesting date is in 80 years, isn’t this only an issue for the next generation of beneficiaries?
This is true to an extent, in that family trusts (and other private trusts such as unit trusts) only really became commonplace in the 1970s and 1980s. However sometimes by design, and sometimes by error, deeds do include vesting dates of much less than 80 years.
For instance, Maddocks has advised a client on the extension of a vesting date for a trust which held more than $40 million of Australian property from 2020, to a date 80 years from the trust's creation (2050). Because the potential CGT and duty consequences of any change to the trust deed which amounted to a creation of a new trust (or 'resettlement') were so substantial, rulings were obtained from the ATO and Victorian SRO prior to execution of the deed of variation.
What do I need to do?
You should take this opportunity to check the vesting date of your trust deed and carefully read the terms in relation to the trust vesting so that you do not risk the trust being administered incorrectly after the vesting date and face tax and trust law consequences for doing so.
More information from Maddocks
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.
More Cleardocs information on related topics
You can read earlier ClearLaw articles on a range of trust topics.
Order Cleardocs trust packages
FAQs
What is the vesting date? The vesting date (or termination date) is the date upon which the trust will end, and in almost all cases this date is specified in the trust deed. You cannot change the vesting date of a trust after that date has passed.
Does a trust need a vesting date? ›
In every state and territory, a trust must vest after no longer than 80 years. An exception is if your trust is based in South Australia. However, if your trust's vesting period is less than 80 years, it should typically be possible to extend the vesting date as long as the trust deed includes a power to do so.
What is the vesting date of a unit trust? ›
A trust deed usually specifies a date, or an event (such as the youngest beneficiary attaining a certain age), on which the interests in the trust property must vest. The deed may describe this as the 'vesting date' or 'termination date'. On vesting, the beneficial interests in the property of the trust become fixed.
What does a vesting date mean? ›
When an individual has something vested to them, they now own and control it. A vesting date is a predetermined time for when the shares, options or trust will be fully given to its rightful beneficiary.
What happens after vesting date? ›
Description: At the vesting date, the annuity holder stops making contributions to the policy. After this, the policy holder is entitled to receive benefits in the form of a regular flow of income. The flow of income is dependent on the return from the investment made by the insurer on different assets.
What does vesting in a trust mean? ›
On the vesting of a trust the relevant beneficiaries (who are entitled under the terms of the trust deed) become absolutely entitled to the property of the trust: that is, the interests in the trust property become fixed and vested in the relevant beneficiaries. The powers of the trustee change when the trust vests.
What is an example of vesting in a trust? ›
For example, Brian creates a trust to pay income to his daughter, Beatrice, for life and then to hold the capital for Beatrice's children on her death. Beatrice's interest is vested in possession, and her children's interests are vested in interest.
What does vesting mean in simple terms? ›
“Vesting” in a retirement plan means ownership. This means that each employee will vest, or own, a certain percentage of their account in the plan each year. An employee who is 100% vested in his or her account balance owns 100% of it and the employer cannot forfeit, or take it back, for any reason.
How do you find the vesting date? ›
If you want to check your vesting schedule, reach out to your company's benefits administrator or human resource manager. They should be able to explain the company's vesting policy and schedule, and provide access to your plan summary or annual benefits statement.
What is the first vesting date? ›
First Vesting Date means the date the first one-third of the RSU become non-forfeitable and converted into Shares as provided for in the Agreement.
When an employee is vested in employer-matching retirement funds or stock options, she has nonforfeitable rights to those assets. The amount in which an employee is vested often increases gradually over a period of years until the employee is 100% vested. A common vesting schedule is three to five years.
What is a vesting period and what purpose does it serve? ›
The vesting period is the schedule over which you gain ownership of various benefits. Common vesting periods are 3 to 5 years, but employers can choose a variety of different schedules, too. Restricted stock units (RSUs) and stock options are commonly offered by employers as part of an incentive compensation structure.
What are the two components of vesting? ›
Vesting has two components: Duration and a Cliff. A vesting duration is how long and how often you will receive your shares. The most common vesting duration is monthly over 4 years, which means that you will receive 1/48 of your equity each month over the next 4 years.
What to do after vesting? ›
If you choose to continue to hold shares beyond the vesting date, any gain in the value of your stock from that point forward will be taxed at capital gains rates. Sell the stock less than a year after vesting and you'll be subject to short term capital gains rates.
What happens if vesting conditions are not met? ›
If an entity or counterparty has the choice of whether to fulfil a non-vesting condition, the failure to meet that condition during the vesting period is regarded as a cancellation (IFRS 2.28A).
What is the difference between vesting date and expiry date? ›
The vesting date is the first date your options become available. The number of options that vest on this date and subsequent dates are subject to the rules of your ISO plan. The expiration date is the final day you can exercise your right to buy your shares at the exercise price.
What are the rules for vesting? ›
“Vesting” in a retirement plan means ownership. This means that each employee will vest, or own, a certain percentage of their account in the plan each year. An employee who is 100% vested in his or her account balance owns 100% of it and the employer cannot forfeit, or take it back, for any reason.
What are the requirements for vesting? ›
To be vested, you must actually meet two requirements: age and service credit. In other words, you have to reach a certain age and have enough working years under your belt to collect your pension. Age: Depending on your retirement formula, your minimum retirement age could be 50, 52, or 55.
What is the 5 year rule for trusts? ›
If the owner died prior to age 72, the five-year rule applies. The five-year rule stipulates that the beneficiary must take out the remaining balance over the five-year period following the owner's death. If the owner died after age 72, the payout rule applies.
What is the 21 year rule for trusts? ›
What is the 21-year rule? Family trusts created during someone's lifetime are deemed to dispose of their property every 21 years. Although the trust is deemed to have disposed of property for tax purposes, an actual disposition typically does not occur.
