Trust cloning means setting up a new trust that is identical to the original, with assets moved across from the first trust to the cloned trust. The ‘clone’ part means that the beneficiaries and other elements of the trust are the same, so it is more or less like taking an apple from table A and putting it on (more convenient/more economical/safer) table B.

In 2008 legislation was repealed that allowed trust cloning without triggering a capital gains tax (CGT) event, because people were taking advantage of the ruling in a way that was not intended by the original legislation.

The original legislation stated that the trusts must be identical, ‘the same’, and this meant everything, but what became apparent is that things weren’t the same because they couldn’t be. Say you photocopy Trust A and then say it is now Trust B, the dates, for example, won’t be applicable. They would need to be changed, making the documents no longer the same.

     So what’s the point of cloning?
At that point, when cloning was thought of as potentially a way to transfer assets without triggering CGT events, making it very suspect, hence the CGT exemption retraction. Now, it is merely another financial method of doing business, but it now triggers a CGT event, and is not as useful as it once was, however it can still be used where necessary.

     Cloning an SMSF
Inside an SMSF, you often have the classic scenario of a small business with two business partners who are married (but not to each other) and also members of the SMSF, taking the total members to four. SMSFs don’t really provide anything useful for anyone outside of the SMSF, so if you wanted to offer more to your family after you die or make sure your surviving spouse has at least a 50 per cent controlling hand in the fund, other arrangements need to be made.

Each family is therefore likely, at some point, to want their own fund, particularly as times change, people move on, and businesses go in many directions, including down. This is where a clone can be useful, though naturally it won’t be an identical clone.

     Clones for discretionary trusts
You may want to have a separate discretionary trust to protect your assets and conduct succession planning. If you have several children who both become the beneficiaries of a testamentary trust, each child might want their own trust and not have to always make joint decisions with siblings. A clone can come in handy here.

     Potential problems to avoid

1. Family trust elections and interposed entity elections can cause hiccups in cloned trusts.
2. Two SMSFs are not considered to be identical if the members’ entitlements are not the same as the last SMSF at transfer.
3. Carefully consider tax issues before cloning any trust – CGT will be triggered, and another option may offer more.
4. Get legal advice from Vanessa Ash on wording: just because two deeds say the same thing, doesn’t mean they ‘say’ the same thing. It’s complex.

Trust cloning is a specialised activity that should only be undertaken under professional guidance by lawyer Vanessa Ash or your accountant.

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