Family Trust Update – Exclude a Beneficiary

How to remove a Beneficiary from a Family Trust

Remove a Centrelink person from your Family Trust

Centrelink may not be happy that a person on Centrelink may potentially get a distribution from someone else’s Family Trust. To pacify Centrelink, this Deed of Variation agrees that the current Trustee and Appointor, and future Trustees and Appointors, will never distribute to the person on Centrelink in the future.

The Deed of Variation to exclude the beneficiary helps prove that the person on Centrelink will never receive anything from the trust.

How to remove your ex-spouse from your Family Trust

The Family Law property settlement is over. The dust has settled. But you find that your ex is still a potential beneficiary in ‘your’ Family Trust. This Deed of Variation confirms the:

• current Trustee and Appointors, and
• future Trustees and Appointors

will never distribute to your ‘ex’.

How to remove a Beneficiary from your Family Trust

All Australian trusts must have three things:

1. Trust Assets, e.g. cash, shares, property, intellectual property
2. Trustee – holds only the ‘legal’ title of the Trust Assets – owner only in name
3. Beneficiaries – true or equitable owners of the Trust Assets

You control the trust and no longer want a certain beneficiary to ever get any income or capital out of your Family Trust. You are excluding this person. This Deed of Exclusion is for that purpose.

Fettering the Trustee’s Discretionary Power to exclude a Beneficiary in your Family Trust

The trustee of a family trust, acting under the terms of the appointment, can distribute the funds to any beneficiary. However, this Deed of Variation ‘fetters’ that discretion. It is no longer possible to distribute to the Excluded Beneficiary. 

To increase the likelihood of this Deed of Variation applying, we also seek to amend the Family Trust Deed (in the same Deed of Variation) in three additional ways. We require you to confirm:

1. Your current Appointors (controllers) and change them (if required)
2. Your Backup Appointors confirm or change them (as required)
3. Trustee, you confirm the current Trustees, or you can change the Trustees

Family Trust Update – Exclude a Beneficiary from a Family Trust

The Family Trust Update to get rid of unwanted Beneficiaries does five things:

1. excludes someone as a beneficiary of a Family Trust
2. confirms or changes your Trustees
3. confirms or changes the Appointors and Guardians
4. confirms or changes your Back-up Appointors (these are the people who control the Family Trust after you die)
5. fully updates your Trust Deed (rules)

1. Remove a Beneficiary from a Family Trust 

Firstly and primarily, the Deed of Variation seeks to remove a person from your Family Trust. This is so that they can no longer get anything from your Family Trust.

While the Appointor is more independent and powerful, the trustee of your Family Trust has a duty to act responsibly and in good faith: Gisborne v Gisborne (1877) 2 App Cas 300. The trustee must take care not to breach its duties. Or the court can wind back the removal of the Beneficiary: Campbell v T L Clacher No 2  [2019] QSC 218.  See, for example, Mandie v Memart Nominees [2020] VSCA 281.

2. You can change the Trustee of your Family Trust

As well as excluding some people, you may wish to change the Trustee of your Family Trust. This is because, for example, you may no longer like the Trustee.

This works in all states and territories, even in New South Wales.

3. Confirm or update the Appointor (controller)

The Appointor controls the trust. It can hire and fire the Trustee. Appointors change for many reasons. People may wish to retire as an Appointor. Perhaps you would like to add your new spouse as an additional Appointor. As well as excluding a Beneficiary, this Deed of Variation:

• • allows the current Appointors and Guardians to retire or be removed, if dead; and
  • confirms those current Appointors who remain as Appointors, to appoint any new Appointors

4. Confirm or change your Backup Appointors

After the Appointors are all dead, the Backup Appointors take control of your Family Trust.

This Deed of Variation and doing the above allow you to confirm or change who you wish to control the Family Trust after you die.

5. The Family Trust is updated for the latest taxation and legal requirements, as well as removing the Beneficiary

Finally, the Family Trust Update does the above four things and also updates and improves your Family Trust rules.

Does the Family Trust deed allow you to remove a Beneficiary?

All trust deeds are different. Read your trust deed, as well as any amending deeds. Ensure that this Deed of Variation is authorised and allowed by the current Family Trust Deed. Legal Consolidated does not give advice on this.

This Deed of Variation to get rid of a Beneficiary in a Family Trust assumes:

• that the Appointor, Guardian, Principal, Protector, or similar person holding power (Controller) has the power to do so.
  • See Mandie v Memart Nominees Pty Ltd [2020] VSCA 281 and Jordan v Goldspring (No 2) [2021] NSWSC 215.
• that no other consent is required from anyone to update the Family Trust, e.g., the family court, if you are divorcing, has given you sole control of your Family Trust.
• the trustee consents to the Deed of Variation. The Trustee signs both the Deed of Variation and the minutes.
• the current Appointors consent to the Deed of Variation. The current Appointors sign the Deed of Variation and the minutes.
• the Family Trust deed allows these changes, or you have a Court order allowing you to do so.
• it is morally correct and supported in the best interests of the Family Trust that the person be excluded as a Beneficiary.
  • See Campbell v T L Clacher No 2 Pty Ltd & Ors [2019] QSC 218.
• The Trustee has no ulterior or improper purpose.
  • See Curwen v Vanbreck Pty Ltd [2008] VSC 338, [71].
• each party signing the Deed of Variation is of sound mind and has a doctor’s certificate to confirm this (which is kept with the Deed of Variation).
• each party signing the Deed of Variation is doing so with full knowledge, without any duress or pressure from family members or other people.

Check with your accountant and financial planner to ensure you comply with the above.

To learn about how a Family Trust operates, watch this free training course:

Jane’s mum had never received a cent from Jane’s Family Trust.

But she was named in the trust deed as an eligible beneficiary. In trust law, this means she was an object of the trustee’s discretionary power. She had no fixed entitlement. No right to demand a distribution. No proprietary interest in the trust fund.

But for Centrelink, that may still be enough

Centrelink looked at the trust. It saw $600,000. It saw mum as a potential beneficiary. It saw Jane, a relative, controlling the trust. Centrelink then treated the trust assets as Mum’s assets for the pension means test.

Jane and her mum felt cornered by Centrelink. Their adviser knew what to do.

The adviser prepared a Deed of Variation to exclude mum as a beneficiary. Once mum was no longer an eligible beneficiary, Centrelink no longer treated the trust assets as hers.

Mum qualified for the means-tested pension.

Centrelink Family Trust Attribution Rules

The Famly Trust rules are in Social Security Act 1991 (Cth) pt 3.18.

Centrelink generally asks three questions.

• First, is the trust a designated private trust? See Social Security Act 1991 (Cth) s 1207P. Most family discretionary trusts are caught.
• Second, is the trust a controlled private trust in relation to the person? See Social Security Act 1991 (Cth) s 1207V. Control arises from powers to appoint or remove the trustee, vary the deed, veto the trustee’s decisions, or influence how trust income or capital is applied.
• Third, is the person an attributable stakeholder? See Social Security Act 1991 (Cth) s 1207X. If yes, Centrelink can attribute trust assets and income to that person. Your Mum and Dad and family members are always caught.

Family Trust Beneficiaries vs Centrelink

The trap for the family trust lies in the definition of ‘associate’:

• Under Social Security Act 1991 (Cth) s 1207B, the term ‘relative’ is broad. It includes parents, grandparents, children, grandchildren, siblings, uncles, aunts, cousins and spouses.
• Under Social Security Act 1991 (Cth) s 1207C, a relative can be an associate.

This is why a parent listed as a beneficiary of a child’s Family Trust creates Age Pension problems. The parent has no control of the trust. But Centrelink still examines the family relationship, the trust deed and the practical control of the trust.

What Centrelink looks at in a Family Trust

If attribution applies, Centrelink counts both income and assets to each of your family members: 

• Trust income may be attributed under Social Security Act 1991 (Cth) s 1207Y.
• Trust assets may be attributed under Social Security Act 1991 (Cth) s 1208E.

An interest in a trust is not ignored merely because it is remote, conditional, restricted or unlikely to be exercised. See Social Security Act 1991 (Cth) s 1207W.

That is the sting. A discretionary beneficiary pleads:

“I may never receive anything.”

Centrelink says:

“You are still within the class of people who can benefit.”

Trust Law vs Centrelink Law

Trust law and social security law do not ask the same question.

In trust law, a discretionary beneficiary generally has no fixed proprietary interest in the trust assets. They only have the right to due administration and to be considered by the trustee. See Gartside v Inland Revenue Commissioners [1968] AC 553 and Kennon v Spry (2008) 238 CLR 366.

Centrelink’s attribution regime is different. It is statutory. It looks at control, associates, expected benefit and practical access to trust wealth.

In Lymberopoulos and Secretary, Department of Family and Community Services [2005] AATA 801, the Tribunal upheld attribution where the applicants were appointors and controlled the trustee company.

In Hopkins and Secretary, Department of Families, Housing, Community Services and Indigenous Affairs [2010] AATA 50, the Tribunal considered the attribution of trust assets under the private trust rules, including the Social Security Act 1991 (Cth) ss 1207P, 1207V, 1207X and 1208E.

Should I vest and end my Family Trust to get Centrelink?

Some clients think they need to vest or wind up the Family Trust.

Often, that is the wrong move.

Vesting means the trust comes to an end, and the trust property is dealt with under the vesting provisions. If the trust owns land, shares or business assets, vesting triggers stamp duty, CGT, asset protection problems and family disputes.

The cleaner solution is often not to move the assets. It is to remove the at-risk person from the beneficiary class.

Does removing a Beneficiary trigger CGT?

A carefully drafted Deed of Variation relies on the amendment power in the trust deed.

The ATO’s view in Taxation Determination TD 2012/21 is that a valid amendment to a trust deed does not, by itself, trigger CGT event E1 or E2 unless the change terminates the existing trust or causes trust assets to be held on a new charter of rights and obligations.

That is why the drafting matters. The deed must amend the existing trust. It must not accidentally resettle it.

Centrelink Deprivation Rules and the Five-Year Rule

Removing a person from a trust may still raise deprivation issues.

The general disposal rules are in Social Security Act 1991 (Cth) pt 3.12 div 2. See especially s 1123, s 1124 and s 1127.

There are also special rules for private trusts, such as a Family Trust, where a person ceases to be an attributable stakeholder. See Social Security Act 1991 (Cth) s 1208M.

In plain English: build the deed to remove the Beneficiary early. Ideally, remove mum and dad from the Family Trust at least five years before they apply for the Age Pension.

1. Lainson v Lainson [1854] EngR 872
2. Tompkins (1931) 44 CLR 546; [1931] HCA 8
3. Wells [1930] NSWStRp 19; (1930) 30 SR (NSW) 150
4. Dougharty [1935] VicLawRp 39; [1935] VLR 333
5. Flower’s Settlement [1957] 1 WLR 401
6. Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298
7. Dawson’s Settlement [1966] 1 WLR 1456
8. Buckle [1998] HCA 4; (1998) 192 CLR 226
9. Breckler (1999) 197 CLR 83; [1999] HCA 28
10. Cachia [2000] FCA 161
11. Hamersley v Newton (2005) 30 WAR 568; [2005] WASC 221
12. Aon (2009) 239 CLR 175
13. Karger v Paul [1984] VicRp 13; [1984] VR 161
14. Wareham v Marsella [2020] VSCA 92