The recent AAT decision in the case of Bendel and Commissioner of Taxation  AATA 3074 is in stark contrast to the ATOs longstanding position that an unpaid present entitlement of a corporate beneficiary constitutes the ‘provision of financial accommodation’ by the company to the distributing trust. […]
Changing beneficiaries in discretionary trusts
James Creevy, current as of: 20 September 2022.
Our ever-shifting social and economic environment continues to fuel a marked increase in requests to change beneficiaries in discretionary trusts.
Beneficiaries are regularly covered in Acis All Areas. This included our August issue where we explored the classes of eligible and ineligible beneficiaries in the Acis Discretionary Trust, as well as the takers in default. In this month’s Acis All Areas, we’ll dig a little deeper and outline the processes involved in changing beneficiaries in a discretionary trust.
Why Add or Remove a Beneficiary
There are a number of motivations for beneficiaries to be added or removed from a trust, including:
- A condition of settlement relating to a family breakdown.
- A person trying to access social security benefits.
- Change in control and/or wealth (including inter-generational transfers).
- Adhering to a bank’s request for changes to the named beneficiaries.
How to Remove and/or Appoint Beneficiaries
Typically, the beneficiaries in a discretionary trust can be changed by preparing a Deed of Amendment. However, many older discretionary trust deeds fail to make it clear whether a specific person can be removed and/or appointed as a beneficiary. This is usually because the trust deed doesn’t contain an explicit power to appoint and/or remove beneficiaries – a power which has been in the Acis Discretionary Trust Deed for many years.
In the absence of an explicit power to remove and/or appoint beneficiaries, the amendment power may be used for this purpose, but only if that power is broad enough. Where the schedule of a trust deed lists the beneficiaries, the amendment power should ideally extend to the schedule in order to change the beneficiaries by way of an amendment. If not, the trustee’s ability to change the beneficiaries may be restricted.
Specific Considerations when Removing and/or Appointing Beneficiaries
Before deciding whether to appoint an additional beneficiary to a trust, we’d always recommend reading the deed to determine whether the intended, new beneficiary already falls within the description of beneficiaries (by way of their relationship to the already named beneficiaries).
If the person doesn’t fall within the existing description of beneficiaries, or if there is a specific desire (or bank request) to name them, a power to appoint additional beneficiaries in the trust deed can be used.
Conversely, while it may seem logical to remove beneficiaries who have passed away, the wider ramifications of such an amendment need to be considered. The removal of a beneficiary who has passed away is generally not legally required. In addition, the removal of a beneficiary may substantially limit the pool of other potential beneficiaries that flow from their relationship with named beneficiaries.
Deed of Release or Deed of Amendment
While a clear and concise beneficiary removal clause can be utilised to remove a beneficiary by way of a Deed of Amendment, a Deed of Release can also be considered, especially to combat any potential uncertainty (in the deed or otherwise). This type of deed circumvents the previously mentioned limitations that may be present in a trust deed as the beneficiary relinquishes any right or interest they may have as a beneficiary of the trust. This does, however, require that the beneficiary themselves sign the Deed of Release, which may not always be practical or possible.
A Deed of Release also demonstrates the intention of a relinquishing beneficiary to be irrevocably removed as a beneficiary of a trust. The irrevocability of the Deed of Release is intended to ensure the removal is permanent.
Examples – Deed of Release
Common Scenarios where a Deed of Release is used:
- Social security benefits – Government bodies generally need to be satisfied that the recipients of social security benefits will not receive funds from other sources (e.g. a distribution from a discretionary trust). A Deed of Release is usually required for this purpose.
- Divorce and Separation – The removal of a former spouse from a discretionary trust structure is a common part of the settlement process. A Deed of Release will irrevocably exclude the outgoing party, leaving no ambiguity in relation to any future distributions
Examples – Deed of Amendment
Common Scenarios where a Deed of Amendment to remove and/or appoint beneficiaries is used
- Restructure – As part of a restructure to transfer control and benefit of a trust from parents to children.
- Banks – To satisfy a bank that requires that all named beneficiaries provide personal guarantees for a trust’s borrowing.
Tax & Duty Considerations
The law surrounding the acquisition and surrender of trust interests differs from state to state. While changes may be completed without triggering resettlement, there could be other tax and duty consequences that need to be considered.
If you’re considering a change to the beneficiaries in a trust, the Acis Legal Services team can assist. Don’t hesitate to contact us with any enquiries.