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Legal Tip 59: Excluding Beneficiaries from Trusts

Discussion in 'Legal Issues' started by Terry_w, 16th Aug, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    18th Jun, 2015
    Excluding Beneficiaries from Trusts

    Sometimes as the composition of families change and it may be decided that one or more beneficiaries of a trust should be excluded. This often happens when there is a divorce or relationship breakdown.

    As an estate planning feature some people may want to exclude certain people, even before they exist as beneficiaries. e.g. if a husband and wife are both named beneficiaries and the wording is such that a spouse of any of the named beneficiaries will also be a beneficiary then one may want to change the wording to restrict it so that if they die the future spouse will not be a beneficiary!

    And it may even be a good idea to keep an ex-spouse, even one you hate, as a beneficiary in a trust you control because it may be a way pay child maintenance with pre-tax dollars. It may be tax effective to stream some income from the trust to the ex directly and have the ex pay the tax. The alternative may be to pay yourself, pay tax, and then pay the ex.

    Changing trusts is very dangerous as it can result in a resettlement of the trust. A resettlement occurs when it is deemed the old trust ceases and a new trust is formed to replace it. This causes stamp duty to be paid on all the trust assets and CGT to be triggered.

    It is generally a good idea to have powers in the trust to allow the trustee or the appointor to exclude beneficiaries. Also a good idea to allow beneficiaries to exclude themselves - which may be desirable for social security reasons.

    Where the trust powers allow the trustee to add or exclude beneficiaries this will generally not result in a resettlement for CGT reasons - but it could still for stamp duty reasons depending on which state the trust holds land and/or securities such as shares or units in trusts.

    For an ATO PBR showing no resettlement of a particular trust see:

    Authorisation Number: 1011300556511

    Drafting tip - make sure the trust gives the trustee and the beneficiaries the power to exclude themselves.