If you run a family business, chances are that you have a discretionary/family trust set up to protect assets for tax purposes or to protect vulnerable family members. It’s a great decision, but what if you had to add beneficiaries or remove them down the line?
Changing a beneficiary in a discretionary trust is complex, yet if you follow the right legal framework, you can do so in a legitimate way.
In this article, we’ll take you through four steps in which you can change the beneficiary of a discretionary trust.
4 ways to change the beneficiaries of a discretionary trust
1. Check the Trust Deed
The Trust Deed should always be your first port of call. The Trust Deed will explain how the Trust can be altered in relation to the beneficiaries of a discretionary trust. This of course includes how they can be added or removed. After carefully reviewing the Trust Deed, you should have a pretty clear idea of what to do. As this trust is discretionary in nature, it’s possible you may not have to do anything.
2. Consider why you want to change the Beneficiaries of the Trust
Depending on what course of action you want to take to change beneficiaries, you may not have to do much at all. For example, if there is another family member you want to add, the Trust Deed may say that all family members are beneficiaries. This means they are already included. A lot of Trust Deeds contain a broad definition of what constitutes a ‘beneficiary’. This is so that beneficiaries can be easily included or excluded at the discretion of the Trustee. Further, you can exclude beneficiaries as distributing income is at the discretion of the Trustee.
Be mindful, however, that as the Trustee, you have to act in good faith and for the benefit of the Beneficiaries.
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3. Execute a Deed of Variation if necessary
If you wish to make a more formal change, you will need to execute a Deed of Variation. The Deed of Variation must follow the instructions provided in the Trust Deed. It is also worth noting that because it is a discretionary trust, it is likely you will have discretionary powers to alter the Trust.
4. Have your trust documents checked by a lawyer
If you don’t want to use a Deed of Variation to change the terms of the Trust, you should at least have a trust lawyer look over the Trust Deed. This will help ensure that you’re complying with all of your obligations. If you have decided to vary the Trust by Deed, then have a lawyer cross-check the Deed of Variation with the Trust Deed. Trustees do have the discretion to determine distribution amounts. However, they still have to comply with the terms set out in the Trust Deed.
Being the Trustee of a Discretionary Trust means that you can distribute the Trust Property to the Beneficiaries at your discretion. This also carries with it the right to change the beneficiaries of a discretionary trust. However, it is important to remember that this discretion is not absolute – so always ensure that the changes you make to the Trust are within your rights, and still comply with your obligations.
Can you change/remove the beneficiaries of a discretionary trust?
Yes, as the trustee of a discretionary trust in Australia, you can change or remove beneficiaries at any time, as long as the trust deed allows for it. This is one of the key features of a discretionary trust, as it provides flexibility in managing the trust’s assets and distributing income.
However, it’s important to note that any changes made to the trust deed must be done in accordance with the trust’s deed and legal requirements. Seeking legal advice from a qualified professional is strongly recommended before making any changes to the beneficiaries of a discretionary trust.
Who is the primary beneficiary of a discretionary trust?
The primary beneficiary of a discretionary trust is any person or entity who is named in the trust deed. There can be multiple primary beneficiaries. The trust may also list “general” or “secondary” beneficiaries, who are people not named but referenced by their relationship to primary beneficiaries, such as children or spouses. The trustee has discretion over how to distribute income or capital between these beneficiaries, depending on the instructions within the trust deed and those beneficiaries’ individual circumstances.
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