Is your trust approaching its vesting date?

What is the ‘vesting date’?

The vesting date is defined in the trust deed as the date on which the trust will conclude, and the entitlements to trust capital and the income therefrom will crystalise.

In modern deeds, this period is often set at 80 years from the commencement of the trust; however some trusts may have shorter vesting periods. Some advisers will have come across more unusual vesting periods such as a date linked to the death of a particular individual or a short period of just a few years.

A common feature of nearly all trust settlements is that they consist of two successive trusts. The first is a “trust as to income” which pays out the trust income to the beneficiaries. The second is a “trust as to capital” which is normally engaged when the trust reaches the vesting date. Once the vesting date is reached the “trust as to income” effectively comes to an end.

From the vesting date, the trustee holds the trust property and the income arising therefrom, for the nominated capital beneficiaries. The interests of those capital beneficiaries are then fixed as to their proportional rights to the trust’s assets and the associated income.

A trustee may seek to extend the vesting date, although it is important to note that the vesting date can only be extended before it arises. If the trust deed does not provide the trustee with the powers to do so, they will have to apply to the courts for a power to affect the extension.

Why it matters?

The vesting of a trust may result in significant tax consequences for both trustees and beneficiaries. However, this will not always be the case and careful analysis and planning is always required as the trust approaches the vesting date.

On vesting, the trust deed will specify the trustee’s obligations in managing the trust fund including where beneficiaries may become absolutely entitled to the assets of the trust.

In dealing with the daily operations of a trust, the importance of the vesting date is sometimes overlooked. As advisers we have seen many cases where the vesting date has passed without any of the associated parties being aware!

Seek Advice

The important message is that the vesting of a trust will change the trust’s nature and can potentially leave the trustee or the beneficiaries exposed to substantial tax and duty liabilities. It is therefore of great importance that clients with a trust in their investment or business structure, be aware of the vesting date and seek advice where appropriate.