Removing Unpaid Present Entitlements for minors in Family Trusts

Discussion in 'Legal Issues' started by thydzik, 3rd Dec, 2019.

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  1. thydzik

    thydzik Well-Known Member

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    Hi All,

    I know you can arrange for a Deed of Debt Forgiveness for adult beneficiaries to remove Unpaid Present Entitlement. (remove the liability that the trust owes the beneficiary for their past unpaid distributions)

    How does it work for minors (below age 18), does a UPE exist? can it be removed?

    Thanks.
     
  2. Terry_w

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

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    I would suggest encouraging a minor to forgive a debt be avoided. This doesn't benefit them and there may be issues, later, suggesting they did not understand what they were signing. There is also legislation in each state about minors contracting, and I think, from memory this may cover deeds as well.

    A UPE certainly will exist if the minor is made presently entitled to income of a trust and this is not give over. A UPE is not a loan, but a debt in equity, so the limitations act won't apply either and the minor can come chasing their money years later when they understand what has happened.

    But, the trust deed should say something like income of a minor can be distributed to their legal guardian or parent who can expend the money for their upkeep (but they could not forgive the UPE on behalf of the child).
     
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  3. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The best way to extinguish a entitlement for a minor etc is to pay for a outgoing such as education for that child. Many clients accumulate these balances in the school and uni years and extinguish them with uni fees, weddings etc. I can recall one large one discharged by the grandparents trust as a house given as a wedding gift.

    A child cant forgive a debt. And its a CGT event to end a right - event C2
     
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  4. Trainee

    Trainee Well-Known Member

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    Can you keep invoices for say family holidays and so on and put that against the UPE?
     
  5. thydzik

    thydzik Well-Known Member

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    Thanks Terry and Paul, good info, didn't think about the outgoings as a method.
     
  6. Mike A

    Mike A Accountant

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    Could be considered a section 100a reimbursement arrangement in certain circumstances. Dealing with this issue for a client at present.
     
  7. Terry_w

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

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    Similar to this?:
    Tax Tip 213: Can a Trust distribute to a private school so you can save tax? Tax Tip 213: Can a Trust distribute to a private school so you can save tax?

    I don't think it would generally be an issue if the one benefitting is the one presently entitled to the trust income.
     
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  8. Terry_w

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

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    If the parent or guardian has received the income and uses it for the benefit of the child the UPE should be extinguished or reduced.

    The problem is a trustee may make a kid presently entitled to say $412 per year for 18 years and on their 18th birthday they ask the trustee to pay up $7,416. The parent cannot just say they have expended that on the child's education or living expenses because nothing has been paid over.
     
  9. Trainee

    Trainee Well-Known Member

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    If say on the kids 16th birthday they all go overseas can the parents submit the invoices to the trust and transfer the UPE from the child to the parent?
     
  10. Terry_w

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

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    no, that would be an assignment.

    If the deed allows (and perhaps if it doesn't) the trustee can pay the parent who can then use the funds to the cost of the trip.
     
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  11. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Prob not. A guardian and parental cost. Not a necessity. Also check the deed. Most allow education. Not travel
     
  12. Scott No Mates

    Scott No Mates Well-Known Member

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    What about international trips for school? Private schools don't come cheap :rolleyes:
     
  13. Terry_w

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

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    This is irrevelant.

    If there is a UPE it is already the money of the child so it can be the legal guardian can demand it.

    If you are talking about whether a trustee can pay a child income it will depend on the terms of the trust. Generally there would be no restrictions unless it was a capital preserved trust. probably set up under a will.
     
  14. thesuperman

    thesuperman Well-Known Member

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    Why not just setup a joint bank account with the kid, pay the $416 into the joint account so there's no UPE then withdraw the $416 as cash yourself (or with your kid) either via an ATM or bank teller or internet banking to another account? That way there's no UPE, your kid can't screw you later in life saying they weren't paid the $416 as it was transferred and the parent still got the $416 that they wanted for the upkeep of the kid.
     
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  15. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Yeah but if you take the kids money it's not discharged so you may demonstrate breach of trust...What is a joint account if you are guardian?..trust obligations aren't discharged by buying movie tickets and trips to Disneyland.
     
  16. Terry_w

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

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    Where a trustee distributes to the legal guardian of a minor, on the minors behalf, they would have extinguished the UPE - subject to the amounts given over.