Certifying schedules of deeds and Family Trusts for a bank

Why lawyers no longer use ‘Schedules’ in their legal documents

Q: As a banker, I found Schedules (some of the old boys at the bank still call them ‘extracts’) useful just to copy that particular page of the SMSF, Trust deed, Loan or Lease agreement. But law firms no longer use them. Why?

A: “Schedules” are a sheet of paper attached to the legal document. They carry some, but not all of the variables. Schedules have no terms of the agreement. For example:

• For a Lease, it lists “Leasee”, “Lessor”. “Lease Fee” and “Term”.
• For a Family Trust, it lists “Appointor”, “Back-up Appointor”, “Trustee”.
• For a Loan Agreement, it lists “Lender”, Borrower”, “Amount Lent”, “Interest Rate”.
• In an Employment Contract “Employer”, “Employee”, “Salary”.
• For an SMSF they state the date of the deed, members and trustees, but it contains none of the rules of binding nominations and SIS Requirements.

Lawyers rarely use Schedules in their legal documents, these days. They are considered old-fashioned and lazy drafting.

Schedules in legal documents were popular before word processors. Up until the 1970s, the lawyer (a man in those days) goes to a printing shop. He prints out the substantive part of the legal document. A big stack of them. His secretary (a woman in those days) merely types in the main variables of the agreement – which is called the Schedule or Extract. E.g. Lender, Borrower, Amount Lent and Interest Rate.

The schedules look terrible. No self-respecting lawyer is caught dead with them these days. A sure-fire way to find out that the legal document is being ‘resold’ by a non-law firm website is to see a “Schedule”.

Since the 1980s law firms have incorporated all parties and terms into the substantive part of the legal document. It looks better. It tells the whole story.

Further, you cannot expect to just copy the Schedule and think you know the entire legal document.

Prudent banks and lenders review the entire legal document

Now let us turn our minds to the banker. A careless banker just copies the Schedule containing the parties’ details. That is a useless amount of misinformation. Proper due diligence is reviewing the entire legal document.

A banker who merely reviews the schedule of an old legal document (or something prepared by a non-law firm website) only gets part of the story.

Careless bankers are duped. For example, the client merely puts misleading information in the Schedule. And then puts the full story in the legal document. The careless banker is none the wiser. I doubt a banker is silly enough to just look at a Schedule and believe that the bank’s due diligence is complete!

That would be akin to the banker getting married to someone on the strength of just their Facebook page. The careful banker reviews the entire deed.

Adams on Contract drafting expresses concerns with Schedules.

To appease the bank and their ‘due diligence’ copy the entire document and email it to them.

Banker wants a ‘certified’ copy of the document – not extracts

A bank asks for a certified copy of your document. Not realising the dance to be performed to satisfy the bank you innocently go to the local chemist, photocopy the deed and get the pharmacist to certify the deed as a ‘true copy of the original’. You then post the certified copy to the bank. The bank manager telephones you and states that, while pharmacists and many other professionals can certify documents as true and original, it is never good enough for the bank.

The bank manager forgot to tell you that the bank wants to certify the trust deed itself. But you are reluctant to courier the original deed to the bank in case it goes missing. So you get in your boat, car, aeroplane or bicycle and go off to the bank offices, if there are any branches left in your neck of the woods.

You take the original trust deed and two photocopies. (Copy the deed yourself as the bank manager often damages your original trust deed when they try and put it through their copier.) Take all three to the bank and the bank certifies both copies. With a pretty stamp, it will say:

‘Certified by the Commonwealth Bank of Australia by Manager John Smith on 13 March year‘

Take one of the certified copies back home with you.

In twenty years when CBA has lost the certified copy, you can post CBA the second CBA certified copy. They often accept that. Other banks will not, but the bank that certified it twenty years ago may. If not, take the original trust deed back to the bank and start the dance again.

Banker wants a list of the beneficiaries of the Family Trust

Q: We are building our client’s Family Trust deed on your website. I specify the Default Beneficiaries. These are ‘the children of Colin Jones and Muriel Jones’. This shows on the Family Trust deed. However, the client’s banker is asking for a list of all the Family Trust’s beneficiaries.

A: I suggest that you read the above information again. We are an Australian-wide tax law firm. We know little about banking. It may be the case that the banker knows little about Family Trusts, Unit Trusts, Bare Trusts, Partnership of Family Trusts, and companies. And that is fine.

Bankers ask for the Beneficiaries of Unit Trusts, Bare Trusts, and Self-Managed Superannuation Funds. And the banker asks for the shareholders of the company. These are usually finite and ascertainable.

The list of beneficiaries of a Family Trust is in the 1,000s. So a banker does not ask for a list of beneficiaries in a Family Trust. Instead, the banker, for a Family Trust, wants:

• Appointors – this is the person who controls the Trustee of the Family Trust
• Back-up Appointors – these are the lucky people who control the Family Trust after the Appointor dies
• Trustee or Corporate Trustee of the Family Trust
• Default Beneficiaries (also called Takers in Default, Specified Beneficiaries and Named Beneficiaries)

Show the banker this information. The banker defers to his or her superior. Their superior helps the banker read the Family Trust deed to get the information required.

Banker wants to know about classes of beneficiaries in a Family Trust

Q: The banker is asking if any of the beneficiaries are a member of a ‘class’. Do the terms of the trust identify the beneficiaries as members of a beneficiary class (eg unit holders, family members of a named person, charitable organisation, or cause)?

A: Again, as stated above, these are not questions for a Family Trust. Almost all beneficiaries in a Family Trust, of which there are 1,000s, are referenced by the ‘class’ they are in.

For example, ‘the children of the Appointor’ is a class. So are ‘all religious groups and educational organisations’. Most Family Trusts in Australia are structured that way. So to answer the two questions is always yes. This is for all Australian Family Trusts. But as I said, it is a silly question to ask. This is because the answer is always yes.

Banker wants a Specified Beneficiary removed from a Discretionary Trust

There may be Capital Gains Tax and stamp duty issues when changing a Default Beneficiary. Build this document to exclude a Beneficiary of a Family Trust. (On another topic, sometimes you have to do things to reduce a foreigner beneficiary for state land tax and stamp duty surcharges. But that is another matter.)

A default beneficiary does have a contingent interest in the Family Trust property. But the interest is contingent upon the trustee not otherwise exercising its discretion. This rarely happens. See Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) HCA 4; 192 CLR 226.

The ATO is of the view that neither an ordinary beneficiary nor a default beneficiary has an ‘interest’ in a discretionary trust of the type referred to in S.104-70. See TD 2003/28.