The Problem Child and Family Trusts

October, 2014

Recent statistics show there are now more than 700,000 discretionary  trusts in Australia used for substantial family investments, business interests and sometimes both. Applied to the average Australian family these conservative estimates mean more than 10% of the Australian population are potential beneficiaries of trusts.

Typically distributions are not actually received by the beneficiary beyond an amount equal to the tax liability that arises. The balance is loaned back to the trustee or another party. However after many years of this practice, distributions to beneficiaries loan accounts can have a decimating effect down the road if a problem child goes guarantor.  It is increasingly common for the problem child, or their creditors to come knocking for the liability that has accrued to them.

It is important to be aware of steps that need to be taken to ensure the wealth of the family trust passes safely. Typically the loan accounts are reduced by:

  1. documenting any expenditure on the beneficiary;
  2. obtaining the beneficiaries consent.

This can be tedious and the consent tenuous if disputed.

A better strategy is the establishment of a further trust in between the trustees and the problem child beneficiary that is already enabled under the trust deed. That new trust calls on the recent High Court decision in FCT v Bamford [2010] to receipt the distribution as capital while distributing the balance as a combination of loans and tax liabilities to our problem child beneficiary. In this way the distributions can be made without the larger accruing liability to the beneficiary (or their creditors). Our Tax Partner, Jack Stuk Mills Oakley Lawyers Melbourne expanded on the details to senior accountants and other lunchtime guests in the Brisbane office last week.

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