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Trustees, Trusts

Initial Trust Settlements

The devil, it is said, is in the detail. While there is no agreement regarding who this statement should be attributed to, this makes it no less correct.

It also makes it no less relevant in the context of trusts, where so often what matters, is not what was intended (certainty of intention aside …) but what is done.

A common feature of a modern deed of trust is a reference to an initial nominal settlement of usually $10.00 or $100.00. Further settlements onto the trust are usually contemplated. Although in the case of an “inheritance trust” it may be that the next settlement will be later and will be pursuant to the settlor’s will.

It is common practice for the initial settlement to be paid into a bank account in the name of the trust, or attached to the trust deed for safe keeping (whether or not this is an acceptable exercise of the trustee’s duty of management can wait for another post another day). However, in some cases, the initial settlement is not paid.

As identifiable trust property is essential to the establishment of a valid trust, questions have been raised from time to time regarding whether a valid trust arises if the initial settlement is not actually paid to the trustees.

Whether a failure to pay the initial trust settlement made a trust void for uncertainty, on the basis that the subject (property) was uncertain was considered in a recent relationship property case. The argument was raised as had the trust not been validly settled, the property owned by the trust could comprise relationship property.

The argument was unsuccessful. The Family Court determined that the trustees had until the trust was wound up to call in the initial settlement. On appeal the High Court narrowed the applicable time-frame to remedy the omission and held that although the initial settlement clearly had not been paid, as the relevant period under the Limitation Act had not expired, the sum could still be recovered from the settlor’s estate, the settlor having since died. The High Court also referred to the case of In Re London Wine Co (Shippers) Ltd (a case where the subject matter was too uncertain for a trust to be created) and differentiated between money and other property noting that “money can be treated differently from property that has inherent value in itself.”

Regardless of whether that is a correct interpretation of In Re London Wine Co (Shippers) Ltd it is useful to consider the implications where a trustee fails to appropriate the initial trust settlement.

The messages to walk away with being:

1. A person who accepts appointment as trustee has a duty to ensure any initial settlement onto trust comes under the trustee’s control. This is a duty owed to the beneficiaries and failure to do so could amount to a breach of trust

2. Where the initial settlement does not come under the control of the trustee this leaves open the possibility of argument that a trust has not been validly settled. The argument may well not succeed. However for the sake of such a small sum, why open the door?, and

3. Failure to assume control of the initial settlement in a timely fashion could still mean that the opportunity to recover the settlement is lost, whereupon questions of trust validity could have greater strength

References

  • In re London Wine Co (Shippers) Ltd [1986] PCC 121
  • Limitation Act 1950 (since repealed and replaced with the Limitation Act 2010)

Discussion

2 thoughts on “Initial Trust Settlements

  1. Hi Vicki. Thanks for the great info. I have a question about the initial nominal settlement… is it treated as a loan from the settlor (that would need gifting) or is it automatically a gift?

    Posted by James | May 7, 2014, 7:55 am
    • The original settlement is not a loan but a settlement onto the trust, which is in the nature of a gift. Generally as the sum is nominal it is not recorded as a gift. To be a valid trust it is essential that there is an initial settlement.

      Posted by vickiammundsen | January 2, 2017, 8:00 pm

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