Legal Tip 411: What are “Sub Trusts”?

A sub trust could potentially mean many things but it would generally be where the trustee of a discretionary or unit trust holds money or assets on trust for someone specific – a trust within a trust.


There are at least 2 situations that I can think of where this could happen

a) Unpaid UPEs

If the trustee of a discretionary trust makes someone presently entitled to income of the trust but this income isn’t paid then it will be what is called a UPE or unpaid present entitlement. The trustee of the discretionary trust may then hold this as bare trustee for the beneficiary.


Example

The Simpson Family Trust has $100,000 of income. The trustee makes Simpson Bucket Co Pty Ltd presently entitled to this income but doesn’t pay it over. It holds that $100,000 and might invest it in shares as bare trustee for Simpson Bucket Co Pty Ltd. The shares and the income from the shares belong to Simpson Bucket Co Pty Ltd – it is absolutely entitled to them and the trustee could not distribute the income from these shares to other beneficiaries of the discretionary trust.

Note that this would generally now need to be converted to a Division 7A loan now otherwise it could be taxable to the trustee as a dividend. TD 2022/11


b) Superannuation Proceeds Trusts SPT

Until a will a Testamentary Discretionary Trust is often set up to receive some or all of the assets of the deceased person. Because there is a chance that the superannuation death benefits will be paid into the estate often this TDT will be set up so that any Superannuation Death Benefits received will be held under a ‘subtrust’ which will limit the beneficiaries to those meeting the definition of ‘dependant’ under tax law. This will prevent the Super Death Benefits from being taxed.


Example

Homer dies and has left a will incorporating a TDT in it. He had also done a Binding Death Benefit Nomination or BDBN to the trustee of his superfund to direct them to pay his death benefits to his estate.

The TDT under his will has 100s of family members as potential beneficiaries. It includes Bart’s future spouse (even though Bart is 10), his grandchildren, related companies etc.

But the Super death benefits will be held under a subtrust where the only people that can benefit from it are Lisa, Maggie, Bart and Marge who are Homer’s minor children and wife. Since no non-dependants can benefit from the super it will be passed tax free to the estate. Had it been passed to the general TDT set up under the will some components of the super death benefits would have been taxed at 15% and some at 30% potentially. The SPT is a closed discretionary trust with just 4 beneficiaries.