Trusts – Unintended beneficiaries and a changing family dynamic

Nov 20, 2022

It is common for discretionary trusts to be established for the benefit of a family. A discretionary trust is a popular structure, especially for families and for income streaming purposes.

Standard trust deeds are used with a standard wide definition of who is a beneficiary.  Beneficiaries are usually defined as either being a primary or named beneficiary or will fall in the class of a general beneficiary.

What happens when the family dynamic changes?

Often the founder of the trust does not turn their mind sufficiently to that definition, or what happens when a beneficiary ceases to be a member of a family circle after divorce or separation.

That can create beneficiaries who are estranged or removed from a family circle as a result of a changing family dynamic.

This changing family dynamic might also make it appropriate for a beneficiary to be excluded.

Excluding beneficiaries

Over time, families grow and circumstances change.

A trust deed will usually allow persons or classes of persons to be excluded as beneficiaries of a family trust, or for a trust deed to be varied to achieve that outcome.

If a trustee exercises a power to exclude a beneficiary, it is not required to give reasons or to notify the excluded person. However, a trustee cannot exercise the power for an improper purpose.

Maintaining a trust that has unintended beneficiaries can also create problems for the trustee and other beneficiaries.

A trustee has a duty to give real and genuine consideration to beneficiaries, and could be under an obligation to make enquiries about the financial circumstances and needs of beneficiaries, if the trustee does not know.

Otherwise, a Court can declare that distributions made in breach of that duty are void, and a trustee might be removed by the Court.

Consideration before making a change

Before making a change, care should be taken so as not to re-settle the trust which could have capital gains tax and stamp duty implications.   However, if a trust deed permits the proposed variation or exclusion of a beneficiary, doing so will usually not be considered a re-settlement of the trust.

The question of whether or not a trustee should vary or exclude beneficiaries, will depend on the circumstances of each case.

Legal advice should be sought before taking any action.

For advice on administering or making changes to trust deeds, contact Jonathan Kenny.