“The starting point in discharging this duty is to at all times retain the original wet, as opposed to electronically, signed trust instrument safe and securely,” he said.

“In other words, the duty is likely to be breached where the trust deed is lost, potentially even if there is a full electronic copy.”

Burgess said if a deed is lost, often the only remedy that will satisfy third parties is court approval of a replacement deed.

“The convergence of holistic tax and estate planning being embraced by more advisers and financier requirements under the 'know your client' regime has seen an explosion in recent reported decisions concerning lost trust deeds.”

“While many of the decisions are 'good news stories' if the financial and loss of privacy costs of court applications are ignored, there are also an increasing number of cases that provide a stark lesson for advisers and clients alike of the material downsides of fails in administrative hygiene tasks; such as maintaining an original document register. “

The most recent case regarding this was the decision in Application by Gainer Associates Pty Ltd [2024] NSWSC 1437 which Burgess said reinforced many of the key rules in this area.

He said in this case the court accepted that a lost discretionary trust deed had two primary beneficiaries, a husband and a wife, both of whom had passed away.

“The trustee company brought the court application because while the relevant trusts act and the general law can supply some terms of a trust and potentially avoid the need for court intervention there was no evidence about who all the potential beneficiaries of the trust were.”

“Where, as was the case here, the court is satisfied the trust deed must have specified other beneficiaries, the trust will be held to fail for uncertainty. In these situations, the court is required to confirm how the trustee should administer the assets of the trust.”

Burgess continued that this is in the context that where a trust fails at law, the assets of the trust revert to the settlor through the mechanism of a resulting trust, and if the deed has been lost the avatar of the settlor is unknown.

Limited evidence was presented to the court in this case despite the trust's financial assets of around $3 million and centred largely on an affidavit of an administrative secretary of the deceased husband.

“The court concluded that the husband may have been the settlor of the trust which is what the secretary recalled, however, it was more likely that the secretary was the settlor,” Burgess said.

“If the secretary was the settlor, the court held this was 'in name only', with any initial settled property in fact provided to her by the husband, including the generally nominal amount paid to the trustee as the initial corpus of the trust.”

Furthermore, the court concluded this finding was based on its experience with family trust deeds and common knowledge that it is “not unusual” for the named settlor to be someone such as the family solicitor or accountant, or a secretary or clerk in the employ of such a person.

Despite this, the court concluded that there could be no doubt that such a named settlor was never intended to have any beneficial interest in the relevant trust.

“This analysis meant that on the failure of the trust, there was a resulting trust in favour of the 'true' settlor – the husband. As the husband was deceased, the assets therefore passed to the sole beneficiary of his will, his wife. As she was also deceased, the court held the assets of the trust would be dealt with under the wife's estate,” Burgess noted.

Burgess continued that in the high profile lost trust deed case of Vanta Pty Ltd v Mantovani (2023) 72 VR 19 (and later cases such as Application of DEK Technologies Pty Ltd as trustee for DEK Technologies Unit Trust & Others [2023] NSWSC 544) the court held that the historical requirement of “clear and convincing proof” of the terms of a lost trust deed was no longer the standard.

Instead, it stated there need only be “sufficient” proof where there was no substantive evidence. However, the court did not consider a range of second-order consequences that would seem to have a material impact on the approach approved.

An example of these consequences included that there appeared to be a material risk that the revocable trust rules under section 102 of the Income Tax Assessment Act would be held to apply if the true settlor of the trust was as held as in this most recent case, one of the main beneficiaries.

“Most specialist advisers would likely conclude the exact opposite of the court's suggestion of what is 'common knowledge' about named settlors,” Burgess said.

“That is, if the named settlor is a mere puppet of the 'true' settlor of the trust, this allows the commissioner to assess the trustee on the income from the settled property in each relevant year, and at a rate referable to the marginal rate at which the settlor would have paid tax on that income.”

Another consequence relates to the capital gains tax of the assets passing from the trust to the husband's estate then from the husband's estate to the wife's estate and finally under the wife's estate.

“It is assumed that CGT would have been triggered at least on the initial vesting of the trust although in theory, assuming the rollover under division 128 of the Tax Act was available, not on the subsequent transfers,” he said.

“Similarly, there would likely be stamp duty on at least the initial transfer to the husband's estate – and possibly on each subsequent transfer.”

Moreover, Burgess noted that concerning purported but likely invalid yearly income distributions, it is also likely that the trustee would be taxed on all income and capital gains at the top marginal rate under sections 99 or 99A of the Tax Act, with no access to the CGT discount regime.

“Any losses the trust had accumulated would have been forfeited at the date of the resulting trust,” he said.

“The trustee company of the trust in this case also acted as trustee of an SMSF, meaning there were likely issues around the integrity of what assets were owned by that fund, a record keeping and compliance issue often agitated by both specialist auditors and, ultimately, the Tax Office.”

Burgess said in the context of lost SMSF trust deeds and other forms of fixed trusts with a narrow range of known beneficiaries who can be proved via other evidence, a court application for adopting a new trust deed is generally seen as unnecessary from a trust law perspective.

“The trustee and all interested beneficiaries can simply resolve and agree to adopt a replacement deed. However, the federal court decision in Kafataris v DCT [2008] FCA 1454 highlights that even for trusts with an ostensibly narrow range of potential ‘beneficiaries’ extreme care must be taken,” he said.

“Best practice therefore dictates that each person who can enforce the administration of the trust should be a party to, and sign a deed of variation that seeks to implement a replacement for a lost SMSF trust deed. However, the case of Application by Gainer Associates Pty Ltd [2024] NSWSC 1437 is relevant in that if there is not even a copy of the trust deed then the ability to identify all potential beneficiaries will often be impossible, and in turn a court application unavoidable.”