Legal Tip 368: Fluid Beneficiaries of Discretionary Trusts

Many discretionary trusts are drafted in such a way that Beneficiaries will change over time. This will happen where the deed is worded so that relatives and spouses of people are included as beneficiaries.


Example

Homer Discretionary Trust has Homer as the only named primary Beneficiary.

The secondary beneficiaries are all the children, grandchildren, brothers, sisters, cousins of the Primary, and their spouses.

Homer has 1 son, Bart.

Bart marries Laura Powers. Once Laura becomes a spouse of Bart she is automatically a beneficiary.

Bart divorces Laura, so she is no longer a beneficiary.

Then he hooks up with Clara Stetson and enters a defacto relationship with her. She is now a beneficiary. ‘Children’ might be defined to include ‘step children’ so her kids are also beneficiaries.

Homer’s cousin has a baby – that baby is now a beneficiary.

The cousin marries someone – that spouse is now a beneficiary.

Homer’s sister starts up a company – this company might also be a beneficiary due to another clause in the trust deed.

Homer’s brother dies. The deceased estate might be a beneficiary as well, depending on the wording.


So, the beneficiaries of a trust are in a constant state of flux! They change over time.

 

I always like to explain to clients there are at least two sorts of beneficiaries.

1.Potential benefiaries are those that fall into the class as defined by the deed. Important to carefully read it and seek legal advice if unsure. eg Is a former spouse a beneficiary ? Potential beneficiaries have no rights to trust property or income and cant demand anything. So if they are a mere potential beneficiary the true element of control is who may give a benefit.
2. Actual beneficiaries. These are parties who HAVE been given trust property or income. Or may have unpaid entitlements.

Tax law can sometimes affect beneficiaries despite what a deed says. EG a Family trust election may impose different tax outcomes on beneficiaries that is narrower than the deed. It doesnt stop Homers cousins baby being a beneficiary under the deed but the family trust election may punish that choice. The penalty may be minor. Some ask...should we amend the deed to narrow the beneficiaries. That also may be unwise. If the trust was amended down too far the trust could be attacked in a court. It may even cease to be a trust if the class of beneficiary was narrowed so it is a sole beneficiary who is also trustee etc. Even a company trustee could be considered the alter ego of the beneficiary. Complex legal issues.

This is why trustee control and the power of appointment is vital to any trust. You dont want some other person/s being able to influence control. They could even alter the terms of the trust not by removing others but by adding new beneficiaries. A important aspect of estate planning needing legal advice.

 

A taxation issue around land tax ans stamp duty may arise if the wording contains beneficiaries that are overseas.

BTW You two are the best

 

if the trust allows 'foreign persons', as defined in the relevant state legislation, to potentially benefit then the trust could be classed as a foreign person and face much higher stamp duty and land tax.

Being overseas is not necessarily an issue. An Australian citizen living overseas will not be a foreign person under NSW law, but a non-resident residing in Australia would be.

 

Those old trusts that were heavily promoted on the forums a few years ago have the words allowing "foreign persons" to be beneficiaries.
From memory Chris Patten?? may have been the name of the person who wrote those trusts which were onsold be many accounants and advisors.
I wonder if the ATO will look back at registered deeds and send a bill for land tax if they were'nt amended.

 

Land Tax is state legislation so the ATO won't be involved, but it is Revenue NSW who administer this for land in NSW and they are doing audits and will impose extra land tax if the deed has not been amended to permanently exclude these evil foreigners. Same in other states although NSW seems to be the most strict

 

Yep my bad.
Those deeds basically worded that and foreign person or foreign company would be a beneficiary.

Actually I'm surprised you haven't posted about this before as I'm asuming you'd be getting requests to amend deeds.

 

Legal Tip 320: Foreign Persons and Companies Owning Land in NSW Legal Tip 320: Foreign Persons and Companies Owning Land in NSW

Legal Tip 330: Bucket Company Trap with Foreign Persons Exclusion Legal Tip 330: Bucket Company Trap with Foreign Persons Exclusion

Tax Tip 170: Foreign Surcharge Exemption for Foreign Developers (NSW) Tax Tip 170: Foreign Surcharge Exemption for Foreign Developers (NSW)