Are You a Beneficiary of a Trust Without Knowing It?

No one told me I was a beneficiary of a trust!

You might be a beneficiary of a Family Trust and not even know it. It does not matter if you have never received a cent from the trust. If you are named in a class of beneficiaries (e.g. all cousins), you are a beneficiary of that trust. The Australian law and the tax office consider you a beneficiary. This fact has serious consequences.

This is not a legal trick. It is a fundamental principle of trust law that was tested and confirmed in court. Understanding this is critical before you set up, or are named in, a Family Trust, Unit Trust or Bare Trust. There are over 400,000 beneficiaries in a modern Australian Family Trust. This article explains the rule and why it matters.

Why am I forced to be a Beneficiary in Australian Law?

Yazbek v Commissioner of Taxation [2013] FCA 39 teaches a harsh lesson. In that case, the Australian Taxation Office issued an amended tax assessment to Mr Yazbek three years after his original assessment. Normally, the tax office has only two years to do this. However, the limit extends to four years if the taxpayer is a beneficiary of a family trust.

But why was Mr Yabek a beneficiary? He never got anything from the trust

Mr Yazbek fought the ATO. He argued that because he had never received any money from his family’s trust, he could not be considered a beneficiary. He was merely part of a wide class of potential beneficiaries, nothing more.

Yazbek’s Ruling: A Beneficiary, even if you get Nothing

The court ruled that you are a beneficiary of a trust if you are on the list of people who could potentially receive money from it. You do not have to get anything.

Think of a discretionary trust like a sports team’s player roster. Just being named on the roster makes you a member of the team. You do not have to be picked to play in a single game.

Similarly, being in the pool of people the trustee is allowed to choose from makes you a beneficiary, even if the trustee never distributes a single cent to you.

You do not need to receive a single dollar to be legally considered a beneficiary. The Yazbek judgment confirmed that your status is determined by what the trust deed allows, not by what the trustee actually does.

The Yazbek case said:

“The word ‘beneficiary’ is not used… to mean a person who has received a benefit from the trust. It is used to mean a person who is an object of the trust.”

How Does the ATO Treat Trust Beneficiaries?

This legal principle is not confined to the Yazbek case. The definition of a beneficiary is fundamental to how trusts are treated under Australian law. For example, Section 95 of the Income Tax Assessment Act 1936 addresses the net income of a trust and its assessment. The entire framework relies on identifying which beneficiaries are “presently entitled” to income, a concept that presupposes a class of potential beneficiaries exists, whether they receive anything or not.

In another case, Richstar; ASIC v Rich [2006] FCAFC 198, the court examined whether assets in a discretionary trust were controlled by a beneficiary for the purposes of corporate law. The court looked at the vast powers of the appointor and trustee. It stated that even though beneficiaries have no fixed entitlement, their status within the trust structure is legally significant.

Risks of being a Beneficiary?

Understanding that you are a beneficiary even without receiving money is critical for two reasons:

1. Tax Obligations: Like Mr Yazbek, you are subject to different rules from the Australian Taxation Office. You have a longer audit window, and your financial affairs are linked to the trust, whether you like it or not.
2. Asset Protection: This principle is the counterpart to asset protection. Assets in a well-structured Family Trust are protected from creditors precisely because no single beneficiary has a fixed claim to them. They are merely part of a potential class.

A Family Trust is a powerful tool, but it must be built and understood correctly. Its rules are absolute and are enforced without sympathy by the courts and the tax office.

To build a compliant Family Trust that provides real asset protection, visit our main Family Trust page here.

Can I be removed as a beneficiary?

Yes, build this document.

 

Build these Trust Deeds online
Family Trust
Family Trust Deed – includes a free Bank Solicitor’s Certificate (worth $1,250) over 18,000 sold
Family Trust Updates:
1. Everything – Deed, Appointor and Trustee (recommended) – includes succession planning & Bank Solicitors Certificate
2. Upgrade the Family Trust Deed only – streaming, Bamford, trust law & tax
3. Change the Appointor – includes succession planning
4. Replace the trustee only
5. Change Name of the Family Trust
6. Exclude a Beneficiary in the Family Trust
7. Exclude Foreigners in the Family Trust
Company – Trustee of a Family Trust – corporate trustee for asset protection & business
Company – Bucket Company – beneficiary of a Family Trust
Annual Distribution Minutes for Family Trust – sign minutes before 30 June
Forgive Family Trusts’ UPEs – human forgives money the Family Trust owes (UPEs & loans)
Deed of Gift – to prove the money you put into your Family Trust was a gift (not a loan)
Division 7A Loan Deed – company lends trust money to Family Trust (UPEs & loans)
Loan Agreement – lend money to your Family Trust
Vesting Deed – wind up your old Family Trust (Centrelink compliant) – dissolve and close your Family Trust
Training Course on Family Trusts – includes the Family Trust Deed
Unit Trust
Unit Trust Deed – pre-emptive rights, asset protection and free bank certificate
Vesting Deed – to wind up your Unit Trust
Company to be trustee of a Unit Trust – corporate trustee for asset protection
Update the Trustees of the Unit Trust – remove and replace the trustee of your Unit Trust
Change the Name of your Unit Trust – update the name of your Unit Trust
Unitholders Agreement – the Unitholders’ set of rules that also protects them from litigation
Bare & Secret Trusts
Bare Trusts:
1. Acknowledgement of Trust Deed – ‘AFTER the Trustee buys’
2. Declaration of Trust BEFORE you buy – ‘secretly buy’