Legal Tip 180: Can a Settlor also be a Beneficiary Under a Trust

A settlor is the person that starts a trust off by giving the initial property to the trustee and asking them to hold this on trust for the benefit of the beneficiaries. The initial property is usually $10.

Most people think that a settlor cannot be a beneficiary of a trust. But this is not the case. There is no law which prevents a settlor from being a beneficiary.

But just because you could doesn't mean you should.

There are tax rules to consider s102 ITAA97
See my tax tip on this at Tax Tip 179: Tax Issues when a Settlor is a Beneficiary of a Trust

 

There can be reasons why a settlor should not have an interest in the trust. If that occurs perhaps there is no trust ??

The new class of discretionary trusts that exclude non resident beneficiaries for duties and land tax can add a concern for this problem. Eg Fred comes from the UK and his Disc Trust has no potential beneficiaries beyond himself. Fred is settlor for his own trust and the sole potential beneficiary.

The deed also must be consistent. Some trust deeds do nominate the settlor as excluded as a beneficiary be default....Often when a lawyer or other adviser settles the trust that clause will be present. Or maybe to protect against the s102 problem explained below. Fred doesnt want to be settlor, (the appointor), trustee and beneficiary. Or change his trust later so this occurs !! That could trigger CGT and duty maybe incl QLD stamp duty on the whole of any real property interest etc....

There are also tax implications under s102 of the Income Tax Assessment Act 1936 where a settlor creates a trust and:

• has the power to revoke or alter the trust to acquire a beneficial interest in the income derived by the trustee, or take back trust property; or
• the income of the trust is payable to the minor children of the settlor.

In such a case, the trustee of the trust will be assessed as having to pay income tax on the income of the trust by the ATO, rather than the beneficiaries .

All reasons why legal advice when establishing a trust is important. If Fred had used a lawyer they may have settled the trust as part of the setup and avoided some of these issues.