discretionary trust questions.

[thydzik]

I have a few questions about discretionary trusts that I would appreciate if someone could answer.

1. payments to the beneficiaries, does the money have to physically move or can it be a 'paper transfer'?

2. what is the maximum number of beneficiaries you can have with a discretionary trust?

3. how does moving money into the trust's account work? can anyone 'loan' money to the trust to use as investment?

thanks in advance.

Travis

 

[alexlee]

1. payments to the beneficiaries, does the money have to physically move or can it be a 'paper transfer'?

Depends if the beneficiary is an individual or a company.

2. what is the maximum number of beneficiaries you can have with a discretionary trust?

The beneficiaries are usually defined in classes. For a family trust, it might be all descendents of Joe Blogs. So the number is in theory unlimited.

3. how does moving money into the trust's account work? can anyone 'loan' money to the trust to use as investment?

Two ways. Either the money is gifted to the trust, or lent as a loan. There are implications for tax, bankruptcy, etc.

Reading some basic (Australian) books on trusts may be useful here. You can ask all the questions you can think of, but the problem will be the ones you don't know to ask.

 

[D.T.]

1. Can be paper transfer. It then becomes a debt owed to them tthat the beneficiary can demand.

2. Infinity. Everyone related to you or spouse including step kids plus any companies you have plus anyone you specifically name

3. You can gift it or loan it. Which is best depends on what you're doing.

 

[alexlee]

1. Can be paper transfer. It then becomes a debt owed to them tthat the beneficiary can demand.

Division 7A may be an issue when distributing to companies.

2. Infinity. Everyone related to you or spouse including step kids plus any companies you have plus anyone you specifically name

However, if you specify unrelated people as named beneficiaries, you might have issues with family trust elections.

 

[Terry_w]

I have a few questions about discretionary trusts that I would appreciate if someone could answer.

1. payments to the beneficiaries, does the money have to physically move or can it be a 'paper transfer'?

2. what is the maximum number of beneficiaries you can have with a discretionary trust?

3. how does moving money into the trust's account work? can anyone 'loan' money to the trust to use as investment?

thanks in advance.

Travis

1. Doesn't have to be paid over. But many issues - beneficiary will be owed this money if not paid = Unpaid Present entitlement. This has various issues relating to loans, asset protection and litigation. If a beneficiary owed money dies for example their executor will need to recover the money - cashflow issues perhaps, and in at least one case I have - litigation

2. no limit but it must be clearly ascertainable if a person is a beneficiary or not at any given point of time

3. Need to check the terms of the trust. Is the trustee able to borrow money from someone, what terms etc. Is the trustee able to accept gifts. How are subsequent settled sums treated? Some deeds are worded in such a way that the giftor will be excluded as a beneficiary.

Seek legal advice.

 

[D.T.]

Terry re #1
If someone dies, how would you go about finding out if theyre a beneficiary of a disc trust, especially due to its disc nature. Then, how would you find out if they had unpaid distributions from it?

 

[alexlee]

Terry re #1
If someone dies, how would you go about finding out if theyre a beneficiary of a disc trust, especially due to its disc nature. Then, how would you find out if they had unpaid distributions from it?

Review their tax returns for past distributions, since the beneficiary would have had to claim the distributions as taxable income. Then go from there.

 

[Terry_w]

Terry re #1
If someone dies, how would you go about finding out if theyre a beneficiary of a disc trust, especially due to its disc nature. Then, how would you find out if they had unpaid distributions from it?

Yes, if a person dies they will have a legal personal representative appointed either by will (executor) or by court order (administrator). This LPR is due bound to call in all loans and maximise the estate before distributing it.

When records are messy, which they often are, this can lead to problems. Often distributions are made but not paid. There will be a situation where it is not clear if the deceased had intended to gift the untaken distributions to the trust or if they were considered a loan to the trust. Records of the deceased may not help much, but records of the trust should show if there are any loans outstanding.

I had a case where the mum had died and the son took over control of the family trust. The executor of the estate was a professional and he called in the large loans (UPE) outstanding. The son argued this wasn't a loan at all (with no evidence) and the matter ended up in the Supreme Court where the executor obtained a judgment against the trustee of the family trust and then proceeded to seize property of the trust. Extremely messy and costly with little benefit because the son was 1/3 beneficiary of the estate anyway.

 

[Paul@PFI]

2. Infinity. Everyone related to you or spouse including step kids plus any companies you have plus anyone you specifically name

Not true. Read the deed to determine who beneficiaries are defined to be. Deed may have been restricted to a tight definition or may be very broad. However it must be clear in definition and cant say "anyone I know" or all people who live in Sydney. This woudnt be clear as it may include people who have lived in Sydney or new beneficiaries will change by the minute etc. The normal deed process is based on a "primary beneficiary" (other names are used) and then clauses which define relationships to that person.

Common issue : Trust deed may allow another co or trust but restrict the nature of the relationship. eg : A trust of which a person who isa beneficiary is a beneficiary. So that involves reading two deeds. The deed may resrict a co to one of which a beneficiary is a Director. They may be a shareholder. This is the area where accountants make big mistakes - Few actually know the words used in the deeds they order and sell. Many tax cases involving tax being applied twice to trust distributions that have been messed up.

Then laws may prevent a trust from being a beneficiary in any case. If the beneficiary trust has a vesting date beyond the vesting date of the trust in question legal advice on the rule of perpetuity may be neededas it applies the the trust deed and state.

Strangeley I never seem to understand why accountants (lawyers are smarter) name the husband AND wife and all kids are primary beneficiaries when the deed defines a beneficiary to include spouse and kids...After divorce the deed MUST be amended at cost. Its far easier to just name one primary beneficiary.

There the issue of excluded beneficiaries may be an issue in the deed. A person may fall within the class of beneficiary but be excluded (ie ex-wife, parents on Centrelink etc). Again often overlooked by the accountant.

Just because someone is a potential beneficiary doesnt they they are or should become "absolutely entitled" to trust income. The Trustee solely (again read the deed) will determine absolute entitlement and rights to trust income and / or capital.

Legal assistance may be needed but reading a trust deed isn't that complex. For complex matters seek legal advice.

 

[Paul@PFI]

Unpaid entitlements raises a number of issues that arise often when ATO gets involved in audit concerns.

What is a loan ?
An accountant may say it is an entitlement that is unpaid. But it may be blended with other amounts that dont demonstrate same intent. What about if a beneficiary credits some cash to the trust to invest along with UPE. Is it a loan at call ? Terms ? What evidnce of the nature. How do we know it wasnt income ? Or may argue it was a gift yet its called a liability in the financials. Is it Trust "corpus" ? Capital !! - A capital distribution to a beneficiary on its return ?? It may be called a loan but not demonstrate features of a loan - No intent to repay. No interest. Outside statutory period and be a "statute barred loan".

Its common to fnd ATO view that a liability is not a loan and that the debits and credits are flows of income. Difficult and costly to address.

Loans should be minuted and documented. And area for legal advice.

I have a UPE strategy I recommend all family trusts consider - Ditributions to kids should be drawn down by paying for life's necessities such as school fees, uniforms and even share of family holidays. Pay for wedding etc. Ditto trust distributiosn to wife. One day she may not be and will ask for the $$. This should exhaust unpaid entitlements so they cannot be demanded later.

 

[Rob G.]

I have a few questions about discretionary trusts that I would appreciate if someone could answer.

1. payments to the beneficiaries, does the money have to physically move or can it be a 'paper transfer'?

Check the deed.

If silent, early case law indicates that the beneficiary has a proprietary interest in the trust.

Later Australian case law and the ATO tend to treat the amount as being held upon a sub-trust.

The amount becomes a debt owing in equity when the beneficiary calls for payment.

2. what is the maximum number of beneficiaries you can have with a discretionary trust?

Check the deed.

Usually it is defined by class.

However, if the definition is too wide or vague then a trust may not in fact exist !

3. how does moving money into the trust's account work? can anyone 'loan' money to the trust to use as investment?

Check the deed.

Loans to a trust can be made, but legal advice is needed on whether the interest paid by the trust is tax deductible or whether the lender has any rights.

Usually an initial sum is settled on the trust and further amounts may be added by way of gift or to be held for a special purpose.

thanks in advance.

Travis

Being a trustee is a serious and onerous duty for which most people are blissfully unaware.

 

[thydzik]

thanks for all the useful replies.

I have a followup question.

if the beneficiaries receives a benefit on paper, and then gifts this amount back to the trust. So there is no liability for the trust to pay it as it was received and gifted back.

realistically, what records need to be kept to prove this occurred?

 

[Terry_w]

thanks for all the useful replies.

I have a followup question.

if the beneficiaries receives a benefit on paper, and then gifts this amount back to the trust. So there is no liability for the trust to pay it as it was received and gifted back.

realistically, what records need to be kept to prove this occurred?

Think of what could go wrong?

That beneficiary could:
die
become bankrupt

There will be questions as to whether it was a gift or not.

I would suggest:

Deed of gift showing the giftor making an irrevockable gift without expection of return.
Physical transfer of money, gift indicted on the transfer
Reflection in the minutes of the trustee
reflection in the financials of the trust.
reflection on the individuals financials (loan applications etc).

And just because the above is done doesn't mean the gift is completely safe as it could be still subject to clawback under
Bankruptcy Act
Conveyancing Act
Succession Act
etc

 

[Rob G.]

thanks for all the useful replies.

I have a followup question.

if the beneficiaries receives a benefit on paper, and then gifts this amount back to the trust. So there is no liability for the trust to pay it as it was received and gifted back.

realistically, what records need to be kept to prove this occurred?

If the beneficiary is only receiving a "paper benefit" the this may be a void "reimbursement agreement". Alternatively, Part IVA may be an issue.

Given that a UPE is an interest in property subject to a trust then any disposition must be in writing to be effective at law.

As Terry says, a deed would normally be appropriate depending upon the circumstances.

Also, as Terry says, bankruptcy or family law may claw back such "gifts". Cross your fingers for at least five years !