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Legal Tip 87: Trusts and Unpaid Present Entitlements

Discussion in 'Legal Issues' started by Terry_w, 13th Oct, 2015.

  1. Terry_w

    Terry_w Tax and Structuring Lawyer Business Member

    18th Jun, 2015
    Southern Highlands NSW
    Sometimes the trustee of a trust will resolve distribute the income of the trust to a beneficiary, but no transfer is actually made. The beneficiary is said to be ‘absolutely entitled’ to the income. It is their money, but they choose not to take it. This is usually done so the trust can reinvest the money.

    These untaken entitlements are called ‘Unpaid Present Entitlements’ often abbreviated to UPE. They can lead to all sorts of legal complications.

    One consequence is that the beneficiary can call on their entitlement at any time. This often happens when there is a falling out between the beneficiary and the person that controls the trust. This can lead to cash flow issues as the trustee may need to sell assets to get the money to pay out the beneficiary’s entitlement.

    Another issue is death of the beneficiary. The money needs to be paid back to the estate so it can be distributed by the will or intestacy laws.

    There are also tax consequences such as Division 7A issues and debt forgiveness issues.

    Where the beneficiary wishes to leave their entitlement in the trust I think in nearly all cases this would be best done by either:

    1. Gifting the money to the trust; or
    2. Lending the money to the trust​

    In each case the money should be distributed to the beneficiary and then transferred back to the trust. Each should be clearly documented so that there can be no dispute as to what the transaction was.