Online trust deeds a hazard for practitioners

Are accountants putting themselves at risk by preparing trust deeds?

Executing trust deeds is not as simple as some practising accountants may think.

There is an alarming trend emerging within the accounting profession: the use of online automated trust deed providers. This is a quick and easy process that allows accountants to have a trust deed prepared and completed within 20 minutes. What’s not to like?

The alarming part of this is twofold. First, accountants do not have professional indemnity cover for any legal work they do and second, they do not have adequate training around trust deed preparation.

Here are three issues I have encountered recently:

Lack of independent signatory

One accountant contacted me after being told by a solicitor that a family trust deed had been invalidly executed. The accountant was the settlor and had witnessed the signature of the trustee. 

In New South Wales, as in most other states, where an individual executes a deed their signature must be witnessed by a person over the age of 18 who is not a party to the deed. The accountant did not realise this and had in fact executed all his family trust deeds in this manner. 

I presented on this topic at a conference recently and was queried by an accountant in the room who admitted that he has used the same process.  It is just easier to not have to find another signature.

Settlor as primary beneficiary

I have had a number of deeds shown to me where the accountant has ordered a family trust and the Settlor has also been named as a primary beneficiary. This creates a possible revocable trust under Section 102 of the Income Tax Assessment Act (1936) and could have severe tax consequences if not picked up for many years.

Death benefit payments

In another matter, a co-trustee of a self-managed super fund (SMFS) – the daughter of the other recently deceased trustee – did not want to pay a death benefit in accordance with a notice provided by her deceased father. 

The notice directed her to pay the benefit to her stepmother. The original trust deed of the fund was prepared in 1997 and gave total discretion to the trustees as to how a death benefit could be paid. There was an amendment in 2007 that gave the members the ability to provide binding death benefit nominations (BDBN). 

Unfortunately, the 2007 amendment was solely made by the deceased trustee. The daughter was not a party to the deed at all even though she was a trustee at the time. The matter will soon go to the Supreme Court of Victoria and we are confident she will not have to act in accordance with the BDBN. 

If the stepmother is also a client of the accountant who “prepared” this deed then she will have reason to make a claim against him or her for losing her rightful death benefit.

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Get it signed and keep records

One online document provider was even spruiking the ability to execute deeds electronically - again making the “process” much simpler. That same firm now offers a "Deed of Ratification of Electronic Signatures" as part of its suite of documents because, quite simply, you can't execute a deed electronically except in very limited circumstances. Too bad if you don't address this and one of the parties dies.

Some accountants also do not seem to understand the importance of keeping original trust deeds and making them available in the future. They seem more concerned with a quick process to get them into the “system” and forget to explain the importance of the document to their clients. 

Could you imagine signing your will and the solicitor simply scanned it into their system and told you to leave with the ordinals? There are many old trusts around with vast assets but no trust deed. There is no easy fix for these and many will be heading to court to have their provisions confirmed.

If accountants want to start moving into areas of the law that are traditionally serviced by solicitors then they need to get themselves adequately trained in how to prepare trust deeds and how to properly execute them. 

They need to understand the importance of having a copy of original documents and that the process of preparing these documents is nowhere near as important as getting them right. Some things can't be fixed that easily.

This is a ticking time bomb for some firms out there.

Peter Johnson FCPA CFP is Director of The SMSF Expert

Read next: What to do when all SMSF trustees die (part 1)

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