Legal Tip 87: Trusts and Unpaid Present Entitlements

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.

 

In many family trusts the (adult child) beneficiary can receive their UPEs and the trustee can discharge those liabilities by paying education, uni fees, weddings etc. The old necessities of life.

 

see a related thread
Legal Tip 161: Avoiding Unpaid Present Entitlements (UPEs) Legal Tip 161: Avoiding Unpaid Present Entitlements (UPEs)

 

I know it's an old thread but this reminds of an episode on "Back in very small business" where the son takes the Dad to ATO for UPEs that were "gifted" back to the family trust. Dad (Don) shows up at the arbitration meeting and talks about all the expenses of raising a son and says the Trust owes him nothing and any/all debts are discharged.

 

How to gift to a trust?

 

That is not possible for adult children.
If minor children the trust deed can allow for it though.

 

You gift to the trustee, settle the gift on trust. Best done via a deed.

 

Yes yes, I think that's what the Dad does. Talk about costs when the son was younger.

 

Care has to be taken. Dad may have a problem if he sits down just pror to little Freddy turning 18 and he hits the trust with a tally of the education etc costs up to that time. Many deeds allow costs to be paid. That means the cost is paid - A reimbursement by a parent / guardian after the event is different.