People Power: Beneficiaries

People Power part 2 is here! We've learned that settlors create the trust and should be independent of the trust. Now it's time to talk about the those that benefit from the trust - beneficiaries!

Intro to beneficiaries

The beneficiary of a trust is the person for whose benefit the trust is set up. A beneficiary is fundamental to a trust, and can be:

• an individual person;

• multiple people;

• an unborn person or people;

• a company or trustee of another trust;

• in charitable trusts, the charitable purpose.

The trustee of a discretionary trust may be a beneficiary of that same trust, but cannot be the sole beneficiary, otherwise it is a taxed trust.

A trust (first trust) cannot name another trust (second trust) as its own entity to a beneficiary; the first trust must name the trustee of the second trust (in its capacity as trustee) to be the beneficiary on the second trust's behalf. This means that where the trustee receives distributions from the first trust, those distributions become trust assets of the second trust to be held for the benefit of the second trust's beneficiaries.

Discretionary trusts excluded, being a beneficiary of a fixed trust gives a person an interest (known as an 'equitable interest') in the trust property. This interest recognises that, whilst the beneficiary is not the legal owner of the trust property, they have a definite right to benefit from it.

In discretionary trusts the right to benefit from specific trust property is subject to the trustee's discretion. Therefore a beneficiary of a discretionary trust does not have an equitable interest in the trust property as its right to benefit is not definite.

Rights of beneficiaries

Beneficiaries have various rights in relation to the trust. These include:

(1)  The right to compel performance of the trust

Any beneficiary or beneficiaries of the trust have the right to seek a court order to enforce the trust. This order will compel the trustee to act in accordance with the trust.

In the same vein the beneficiary may be able to seek protection of the trust property by way of a court order to bring the property under proper administration.

(2)  The right to restrain a breach of trust

Where a trustee intends to act in a way that is in breach of trust, a beneficiary has the right to seek a court order to prevent the breach (an injunction).

(3)  The right to demand and receive accounts

A beneficiary has the right to demand that the trustee render the accounts of the trust,  to inspect and to query those accounts. Beneficiaries may also demand from the trustee information about the dealings with trust property.

(4)  The right to follow trust property

The beneficiaries are entitled not only to trust property, but also to proceeds derived from that property. For example, if a house is on trust and is leased, the proceeds from the lease are trust funds.

(5)  The right to extinguish the trust (in the case of fixed trusts)

In the case of a fixed trust, a beneficiary that is:

• at least 18 years of age; and
• has an absolute interest in the trust assets and income;

may require the trustee to transfer the trust assets to them and thus terminate the trust.

Beneficiaries of discretionary trusts do not have this right because their right to the trust assets is not definite.

Can a beneficiary exclude, limit or surrender receipt of benefit from the trust?

A beneficiary may want to surrender their entitlement under a trust (that is, disclaim their trust entitlement) if it would have a negative impact for them - for example, significant tax consequences. If a beneficiary:

• has complete knowledge of their interest in a trust; and

• has full intention not to receive that interest;

then the beneficiary can reject the interest by an intentional and unequivocal disclaimer. Disclaiming their interest retrospectively precludes the beneficiary from any entitlement under the trust.

A beneficiary cannot, however, accept some entitlements and disclaim others. But if a beneficiary has a full, absolute interest in the trust property, the beneficiary can instead:

• assign (in writing and signed by the beneficiary) their interest, or part thereof, to a third party;

• direct (in writing) the trustee to hold the beneficiary's interest in trust for a third party;

• declare that they (the beneficiary) hold their interest in the original trust, on trust for a third party; and

• direct the trustee to transfer legal title in the trust property to a third party upon vesting of the trust.

Again, in a discretionary trust the beneficiaries do not have an absolute interest in trust property so this does not apply.

Can trust entitlements of a beneficiary be limited or suspended in certain circumstances?

Theoretically, a trust deed may limit a beneficiary's entitlement in certain circumstances. For example, a trust left to the late Michael Wright's "secret daughter", Olivia Mead, has been in the news recently. This trust is said to contain a provision limiting Ms Mead's trust entitlements if she is convicted of drug or alcohol offences, or is involved in certain religions. Though Ms Mead's lawyer argues that this limitation could operate in an "oppressive" way, it illustrates how a settlor, when creating a trust, may choose to limit beneficiaries' entitlements in particular circumstances.

In summary

In short, the beneficiaries of a trust are the people or purpose for whose benefit the trust is created. Beneficiaries have various rights and can choose to disclaim their interest in the trust. Similarly, it is possible to limit beneficiaries' trust entitlements in certain situations by a provision in the trust deed.

Next time we'll be discussing one of the most powerful people involved in a trust - the appointor! Stay tuned!

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