Legal Tip 381: Beneficiaries of a discretionary trust following a divorce

Discussion in 'Legal Issues' started by Terry_w, 11th Mar, 2022.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Divorce or separation can change who the beneficiaries of a trust are and this can sometimes have unintended consequences.


    Example

    The Simpson family trust is set up with Homer as the only named beneficiary. Other beneficiaries include the children of Homer and their spouses.

    Bart marries a lovely girl, Betty. But Bart goes off the deep end and starts drinking and gambling and Betty gets to the point where she divorces him. She remains the sole carer of the children and is very close to Homer and the rest of the family.

    Since she is looking after the children and Bart is living in a gutter in broken hill, and the family loves her, Homer wants to cause the Simpson Family Trust to distribute some of its profits to Betty.

    But the wording of the deed doesn’t make Betty a beneficiary anymore as she is no longer the spouse of a beneficiary since she divorced Bart.

    This is a pity as she has no taxable income and Homer has to distribute the money to himself and then gift to Betty, but he loses 47% of it in tax.

    Check to see if the beneficiaries of the trust includes spouses and if so if it includes former spouses.
     
  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Also consider if a Family trust election had been made in a earlier period. It may be limiting on new beneficiaries with consequential tax issues. Some people see clever strategies to inject new money from Betty into a trust. May be a concern under the injection tests on top.