Trust Issues | Why does the Governing Law of a Trust Matter?

The governing law of a trust determines which State or Territory laws apply to the trust and which courts have the jurisdiction to hear a dispute.  Therefore, a trustee must know which laws govern the trust to perform their role properly.

The governing law of a trust will have implications for: 

  • The administration and interpretation of the trust; 
  • The rights and responsibilities of the trustee and the beneficiaries; 
  • The taxation of the trust, and in particular any duties implications; 
  • When the trust ends or vests; and 
  • Which courts have the authority or jurisdiction to adjudicate disputes. 

If a trustee misidentifies the trust’s governing law, then any trust administration and trust disputes may be incorrectly addressed. 

Governing law clause

Most trust deeds have a governing law clause that expressly identifies which State or Territory laws apply to the trust and which courts have the jurisdiction to hear a dispute.  For example, if NSW was chosen as the governing law, then one would look to its Trustee Act and other legislation for the trust. This is usually the starting point; however, it may not be the end of the story.  Courts have the final say as to the applicable jurisdiction and they determine this on the assessment of which State law has the closest and most real connection with the trust. 

Further, if a court finds that your choice of governing law for your trust is founded on an ulterior motive, for example, to avoid a piece of law that would otherwise be applied, then that will also factor into consideration.  

Closest and most real connection

On occasions the trust deed may be silent or uncertain about the settlor’s choice of governing law.  In these cases, the court will find the most appropriate governing law of a trust to be the one with which the trust has ‘its closest and most real connection’1. 

The following factors are considered when determining this connection: 

  • The place the trust is administered; 
  • The place where the primary assets of the trust are situated; 
  • The place of business or residence of the trustee; and 
  • The object or purpose of the trust and the places where they are to be fulfilled. 

Can I change the governing law of my trust?

From time to time, the trustees of a trust may wish to change the governing law of the trust. Perhaps: 

  • The expressed governing law does not allow the efficient administration of the trust; 
  • The place where the trust assets are located or administered changes; 
  • The trustee lives in another State; or 
  • The trust is about to vest and the trustee and beneficiaries wish to extend the life of the trust. 

It is possible to change the governing law of your trust. However, we usually do not recommend this, since a change of this magnitude runs the risk of ‘resettling’ the trust giving rise to adverse tax consequences.  A resettlement is generally caused by a change to the terms of the trust so significantly that it is effectively the same as transferring all the assets of the trust to an entirely new trust. 

That said, there may be situations where there is no genuine connection between the governing law stipulated in the trust deed and that jurisdiction, or the trust may hold property or be administered across multiple jurisdictions.  In those situations, does a different governing law apply to the trust?  This is still an unsettled question. However, our view generally is that: 

  • If the trust has all its assets in one State, then those assets will be subject to the governing law of that State; 
  • If the trust has most of its assets in one State together with other connections to that same State, then notwithstanding it may have assets in other Australian States, there is an argument that the same governing law applies to all assets of the trust. However, we are not aware of this view having been tested in the Courts; and 
  • If, notwithstanding the governing law of the trust stipulated in the trust deed, the trust has all its assets outside of the governing law jurisdiction, then it is very likely that those assets will be subject to the laws of the State in which they are located. 

In all States and Territories, the trustee may apply to the Courts for advice or directions about how to interpret the trust deed and/or the actions they can or should take.  

How we can help

Trust deeds and their governing laws can be confusing.  If you are unsure what laws apply to your trust, call us on 1300 654 590 or email us. 

 

The information contained in this post is current at the date of editing – 25 November 2022.

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