Outdated deeds, missing variations and non-compliant distributions are exposing trustees and beneficiaries to serious tax and legal risk
By Tracy Collins | Accredited Specialist, Wills & Estates | Special Counsel, Nevile & Co. Lawyers
Discretionary trusts have been the workhorse of Australian family and business structuring for half a century. They are flexible, they distribute income tax-effectively between beneficiaries, and they offer a real measure of asset protection. But a trust is only as good as the document that governs it – and for an enormous number of trusts established in the 1970s, 1980s and 1990s, that document has not kept pace with the law, with the family it was built around, or even with itself.
In our practice, when we are asked to review a long-standing family trust, it is common to find that the client has not seen the original trust deed in years, is unaware of amendments made along the way, and has been relying on their accountant to prepare annual distribution resolutions based on assumptions about the trust terms rather than the deed itself. Individually, each of these gaps is a risk. Together, they can be the difference between an effective, tax-efficient structure and a trust that triggers a six-figure tax assessment, a family dispute, or both.
Most Important: Find the Complete Document Set
A discretionary trust is not a single document. It is the original deed, plus every deed of variation, deed of amendment, deed of appointment or removal of trustee, deed of appointment of appointor, and any deed extending the vesting date that has been executed since. We regularly see trusts where:
- The original deed cannot be located at all, and the trust has been operating for decades on the basis of a photocopy, a draft, or institutional memory.
- Variations were prepared by an accountant or adviser but never validly executed, stamped (where required) or retained.
- A variation was made without checking the variation power in the original deed, meaning the change may be void or voidable.
- Trustee or appointor changes were made informally – for example, by correspondence or minute – rather than by deed, leaving the formal trustee or appointor as someone who has since died, lost capacity, or has no ongoing connection with the family.
Before any distribution decision, restructuring step, succession plan or sale of trust assets is undertaken, the complete chain of documents needs to be assembled and reviewed by a lawyer, not simply assumed to be “the same as last year.” Where documents are missing, it may be possible to reconstruct the trust’s history or, in some cases, necessary to consider a court application or a deed of ratification or confirmation. The earlier this is identified, the more options are available and the lower the cost of fixing it.
Why So Many 1970s and 1980s Trusts Are Now a Problem
Discretionary trusts surged in popularity in Australia from the 1970s through the 1980s, driven by their income-splitting and asset protection benefits. Many of those original deeds are now 40 to 50 years old, and the standard precedents used at the time simply did not anticipate the issues that matter most today. Common defects we see in deeds of this vintage include:
No mechanism for death or incapacity of the controller
Most older deeds focus on the trustee and give little or no thought to the appointor (sometimes called the principal, guardian or other name) – the person who actually controls the trust by virtue of their power to appoint and remove trustees. Where a deed is silent on what happens if the appointor dies, loses capacity, or becomes bankrupt, control of the trust can pass unintentionally, become contested between family members, or fall into limbo with no one able to validly exercise the trustee’s powers. We have seen sibling disputes, blended family disputes and contested succession all stem from this single gap. A modern deed should clearly provide for a chain of successor appointors and a workable mechanism if an appointor loses capacity, including dovetailing with that person’s enduring power of attorney.
No effective trustee succession on death of an individual trustee
Where an individual (rather than a corporate trustee) holds office, an old deed often fails to specify clearly who steps in if that person dies or cannot act, particularly where the deed pre-dates current drafting practice. This can leave a trust effectively unable to be administered at exactly the moment – the death of the founder – when family members most need it to function smoothly.
No exclusion of foreign persons from the class of beneficiaries
This is, in our experience, the single most expensive defect in legacy trust deeds, and it is almost universal in deeds drafted before the mid-2010s. Older deeds typically define the beneficiary class extremely broadly – spouses of beneficiaries, all of their descendants, related entities, and so on – without any power for the trustee to permanently exclude foreign persons from that class. Because state revenue laws now look at who is capable of benefiting under the trust, not just who actually receives a distribution, a trust can be deemed a “foreign trust” simply because its potential beneficiary class includes someone who happens to be a foreign person, even if that person has never received and will never receive a cent.
The Tax Consequences of Getting It Wrong
The consequences of an outdated or non-compliant deed, or of distributions that do not strictly follow the trust terms, fall broadly into three categories.
1. Foreign person surcharges on land
If a discretionary trust holding Victorian (or other state) residential land is deemed a “foreign trust” because its beneficiary class is not validly restricted to exclude foreign persons, the trustee can become liable for foreign purchaser additional duty on acquisition (an extra 8% in Victoria, on top of standard duty) and absentee owner/foreign owner land tax surcharges every single year the land is held (currently up to 4% of the land’s taxable value per annum in Victoria, with similar surcharges in other states). These amounts are not trivial: on a $2 million investment property, a missed foreign-person exclusion can mean an additional $160,000 of duty on purchase and tens of thousands of dollars in extra land tax annually, often discovered only on a revenue office audit or at the point of sale, years after the exposure began, with interest and penalties added on top.
2. Trustee assessed at the top marginal rate
Under section 99A of the Income Tax Assessment Act 1936, if trust income is not validly and effectively distributed to a presently entitled beneficiary by the required date (30 June, with resolutions often needing to satisfy the ATO’s documented standards), the trustee can be assessed on that undistributed income at the top marginal rate, currently 47% including the Medicare levy, with no tax-free threshold. If a distribution resolution refers to a class of beneficiary that does not exist in the trust deed, names a beneficiary outside the defined class, or is made under a since-superseded version of the deed, the resolution may simply be invalid. The Commissioner can then treat the income as undistributed, exposing the trust to default assessment and reopening years that the family believed were settled.
3. Unintended capital gains tax and resettlement risk
Where a purported deed variation goes beyond the variation power actually contained in the original deed, the change may be regarded as creating a new trust for tax purposes – a “resettlement.” That can trigger a deemed disposal of trust assets for capital gains tax purposes and a fresh round of stamp duty, even though no assets were actually sold or transferred to anyone. This risk is heightened in older deeds where the variation power is narrow, ambiguous, or was simply not checked before a variation was made.
4. Family law and asset protection exposure
A trust that has lost a validly appointed controller, or whose control has drifted to the wrong person, is far more vulnerable in a family law property settlement or a creditor claim. Courts and litigants look closely at who really controls a trust; ambiguity in the chain of appointors and trustees creates uncertainty that works against the family the trust was meant to protect.
5. Disputes between beneficiaries and family members
Beyond tax, an unclear or outdated deed is fertile ground for disputes – over who should control the trust after a death, who was entitled to historical distributions, and whether a variation was ever validly made. These disputes are expensive to resolve and can do lasting damage to family relationships, often at the worst possible time, such as shortly after the death of a parent.
What a Proper Trust Review Involves
A thorough discretionary trust review should cover each of the following:
- Locating and verifying the original trust deed and every subsequent variation, appointment and removal document, confirming each was validly executed under the power available at the time.
- Confirming the current trustee and appointor (or principal/guardian) and checking that succession on death or incapacity is clearly and workably documented, including alignment with the controller’s will and enduring power of attorney.
- Reviewing the definition of beneficiary and confirming there is an effective, permanent power to exclude foreign persons, and exercising that power by deed where it exists but has not yet been used, particularly if the trust already holds or is going to hold real estate.
- Checking the vesting date and confirming the trust will not vest unintentionally, which carries its own significant tax consequences.
- Reviewing recent distribution resolutions against the actual terms of the deed, including the defined beneficiary class and any conditions on the trustee’s discretion.
- Considering whether the trust’s structure still matches the family’s current circumstances, including blended families, beneficiaries who have become non-residents, and business succession plans.
Our Recommendation
If your discretionary trust deed was prepared before 2015, has not been reviewed in the last three to five years, or you are not entirely sure where the original deed and all variations are currently held, now is the time to have it reviewed – before a property settlement, before the next round of land tax assessments, before a death in the family, and well before an ATO or State Revenue Office audit forces the issue. The cost of a proactive review is almost always a small fraction of the cost of unwinding a problem after the event.
Nevile & Co. Lawyers regularly assists trustees, appointors and their accountants to locate, review and, where necessary, vary discretionary trust deeds to ensure they reflect current law, current family circumstances, and the protections that a well-drafted modern deed should provide.
About the Author
Tracy Collins is an Accredited Specialist in Wills & Estates and Special Counsel at Nevile & Co. Lawyers. She advises on estate planning, testamentary and protective trusts, enduring powers of attorney, asset protection structuring including discretionary and family trusts, and the administration of deceased estates.
Contact Tracy Collins on (03) 9664 4700 or at nevileco@nevile.com.au to arrange a discretionary trust review.
This article is general information only, current as at June 2026, and does not constitute legal or tax advice. You should obtain advice specific to your circumstances before acting on any matter referred to in this article.
