4.14.3.70 Special disability trusts - rules regarding related parties

Summary

The model trust deed contains compulsory clauses which establish rules about related parties. Clause 3.5(b) of the model trust deed identifies the following people and entities as related parties:

• the person who is the settlor of the trust, as identified in the trust deed (unless the trust was created by a will)
• the trustee other than a professional trustee for the purposes of paragraph 5.1(a(iii)) of the trust deed
• any donor to the trust, meaning any person who makes unconditional contributions to the trust
• the principal beneficiary of the trust, meaning the person for whose benefit the trust was established
• a person who is an appointor under the trust deed
• an immediate family member of the principal beneficiary of the trust, which means a parent, step-parent, legal guardian, grandparent or sibling
• a parent or sibling of any of the people listed above
• a descendant of any of the people listed above
• a partner of any of the people listed above, and
• any entity of which any of the people listed above is a director, shareholder, trustee, or holds the power to appoint a director or trustee, except for entities which are publicly listed companies.

If any of the following occur, the trust cannot be classed as a special disability trust:

• A related party receives a loan or any other financial assistance from the trust.
  • Example: Peter, who is the father of the principal beneficiary of a special disability trust, cannot borrow money from his son's trust.
  • Example: Tanya and her sister own an unlisted private company. Tanya is also the mother of the principal beneficiary of a special disability trust. The trustee cannot lend money, or provide other financial assistance, from the special disability trust to Tanya, her sister or the company they co-own. This is the case even if the conditions of the loan meet the investment strategy provisions in clause 6.3 of the model trust deed. Tanya, her sister and the company are all related parties under clause 3.5(b) of the model trust deed and clause 3.5(a) prohibits loans and other financial assistance to related parties.
• The trustee intentionally acquires property from a related party, other than:
  • a listed security acquired at market value, or
  • an unconditional contribution made as a donor to the trust.
  • Explanation: The trustee of a special disability trust cannot purchase property from a related party other than stocks, shares or bonds that are officially listed on a stock exchange for public trading and purchased at market value. The trustee may accept from a related party residential property that is donated without any conditions or limitations attached.
• A trust cannot hold shares in an entity which is a related party, even if the shares are gifted. This is because the entity which is the related party would receive financial benefit by using the capital represented by the shares owned by the trust.
  • Example: The trustee of a special disability trust cannot purchase shares in an unlisted company owned by the principal beneficiary's father.
  • Example: The trustee could purchase shares in a listed company with shares held by many stakeholders, even if the principal beneficiary's father is also a shareholder. Any purchase of shares would need to satisfy the investment strategy provisions in clause 6.3 of the model trust deed and be for the primary purpose of the trust (reasonable care and accommodation for the principal beneficiary) and other purposes primarily for the benefit of the principal beneficiary under clause 2.1 of the trust deed.
• A related party is employed, engaged or paid as an agent, contractor or professional for any services in relation to the trust or the principal beneficiary of the trust.
  • Example: Steven, brother of John, who is the principal beneficiary of a special disability trust, assists with maintenance of John's accommodation. Steven cannot receive remuneration from the special disability trust for this work.
• A related party enters into an uncommercial transaction (as defined in clause 9.3 of the trust deed) with the trustee.
  • Example: The trust holds residential property as an asset. A related party performs work on the property and in return is allowed to live in the property.
  • Example: A trust property is leased or sold by the trustee to a related party at below market value.

The model trust deed also contains a compulsory clause 3.3(a) which prohibits the trust from purchasing or leasing property from anybody who is an immediate family member (parent, step-parent, legal guardian, grandparent or sibling) or child of the principal beneficiary of the trust even if the property is to be used for the principal beneficiary's accommodation. However, the immediate family member could transfer ownership of the property to the trust.