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Legal Tip 125: Trusts and Present Entitlements

Discussion in 'Legal Issues' started by Terry_w, 22nd Apr, 2016.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    18th Jun, 2015
    Trusts and Present Entitlements

    There is a concept in trust law that involves a beneficiary being entitled to income and/or capital of a trust. A beneficiary becomes entitled to income or capital according to the deed.

    If the trust is a discretionary trust this is usually, depending on the wording, only when the trustee makes a resolution. Until that time no one beneficiary has any entitlements to the assets of the trust. Once the resolution is made the beneficiary has what is known as a ‘present entitlement’.

    This has important asset protection consequences because if a beneficiary is sued the creditors can stand in the shoes of the beneficiary. In effect the creditors become the beneficiary. They are entitled to whatever the beneficiary is entitled to. In the case of most discretionary trusts they will not be entitled to any property of the trust until the trustee resolves to make a distribution to them – they would then be ‘presently entitled’.

    Even if the trustee hadn’t physically paid the money across the beneficiary is legally entitled to that money and they can demand it. Thus it would fall into the hands of creditors.

    There are also tax consequences too as the person presently entitled to the income is the one that is taxed on that income. If a trustee resolves to pay $100 to John then the trust is not taxed on this but John is. Even if the $100 is not actually paid, John is liable for the tax as it is his income. If a trustee does not make a resolution then the trustee is taxed on the income, usually at the top marginal tax rate which is currently 47%.

    With a fixed trust, usually the deed will be worded such that the beneficiaries (which are usually unit holders) will be presently entitled to income and capital of the trust, subject only to the proper expenses of the trust, and entitle in proportion to their ownership of the units of the trust. This is why a fixed unit trust will offer little asset protection if a unit holder where to become bankrupt.

    Unpaid Present Entitlements (UPE) are those entitlements that are not actually paid across. The trustee usually makes a resolution to distribute, but hangs on to the money to reinvest.

    I will cover UPEs in more detail next time as there are important asset protection, estate planning and tax issues to consider.
    Greyghost likes this.