
Should You Exclude Foreign Beneficiaries from a Discretionary Trust?
Introduction: Making the Right Decision for Your Trust
If you’re setting up a discretionary trust, one of the decisions you may face is whether or not to exclude foreign beneficiaries. This decision can have significant cost implications, especially as state taxes and duties on property held by trusts with foreign beneficiaries are on the rise for certain states. In this blog post, we’ll explore why it’s important to carefully consider this decision and what could happen if beneficiaries move overseas.
Increased Taxes and Duties for Trusts with Foreign Beneficiaries
In some states in Australia, trusts that have foreign beneficiaries may face higher taxes and duties, particularly in relation to property ownership. These foreign surcharge regimes are intended to limit foreign ownership of Australian assets and can lead to significant additional costs for the trust.
Surcharge Land Tax and Stamp Duty
States such as New South Wales, Victoria, and Queensland have introduced surcharge land taxes and stamp duty surcharges for trusts that have foreign beneficiaries. These surcharges can add a considerable financial burden, often amounting to thousands of dollars in extra taxes and duties each year.
For example:
- In New South Wales, if a discretionary trust has any foreign beneficiaries, it could be subject to a surcharge of 2% on land tax and an additional 8% in stamp duty on property purchases.
- In Victoria, foreign purchasers can face an additional 7% stamp duty surcharge and a 2% surcharge on land tax.
Even if no distributions are made to foreign beneficiaries, the potential for such beneficiaries to receive a distribution can still trigger these surcharges. This is a key reason why some trusts include clauses that exclude foreign beneficiaries.
On cost alone, it may seem like a obvious choice to always exclude foreign beneficiaries, however there may be unforeseen downsides of that too.
The Impact of Beneficiaries Moving Overseas
One potential issue to consider if you do exclude foreign beneficiaries, is what happens when the main beneficiaries of the trust become foreign residents. If a trust is structured to exclude foreign beneficiaries and one of the key beneficiaries moves overseas, they would be disqualified from receiving future distributions. This could cause an issue if all the people who should be receiving distributions can’t receive them.
Here’s how this could affect the trust:
- Loss of Key Beneficiary Rights: If a primary beneficiary becomes a non-resident (i.e moves overseas), they can no longer receive distributions from the trust, which could impact financial planning, succession, or estate distribution.
- Need for Trust Deed Amendments: Trust deeds that have restrictions on foreign beneficiaries may require amendments or alternative planning if key beneficiaries move overseas. This may have flow on impacts depending on the rest of the trust deed.
Should You Exclude Foreign Beneficiaries?
The decision to exclude foreign beneficiaries should be carefully considered. Here are some key points to help you weigh your options:
Reasons to Exclude Foreign Beneficiaries
- Avoiding Additional Taxes and Duties: By excluding foreign beneficiaries, your trust avoids the risk of being hit with surcharge taxes on land tax and stamp duty, which can save thousands in additional costs over time.
- Simplifying Trust Administration: Excluding foreign beneficiaries can make trust management simpler and less risky. It ensures that your trust won’t be subject to surprise taxes or duties because of changes in the residency status of beneficiaries.The above is only applicable if you plan on purchasing property with that Trust. If that’s not on the cards then it makes the decision much easier to include all beneficiaries.
Potential Downsides to Excluding Foreign Beneficiaries
- Future Flexibility: Excluding foreign beneficiaries can limit the future flexibility of your trust, particularly if the main beneficiaries move overseas. This could complicate succession planning or create the need for a trust restructuring.
- Complexity for Beneficiaries Abroad: If any of your beneficiaries are likely to move overseas, it could limit their ability to benefit from the trust. If you exclude foreign beneficiaries, you’ll need to consider alternative structures or planning to support those beneficiaries in the future.
Key Considerations Before Making a Decision
- State-Specific Tax Rules: Make sure you fully understand the surcharge land taxes and stamp duties in the state where the trust’s assets are held. These rules vary from state to state and can have significant financial implications.
- Beneficiary Residency: Consider the likelihood that any of the trust’s main beneficiaries may move overseas in the future. If there’s a high chance, excluding foreign beneficiaries could become a challenge for long-term planning
- Trust Deed Flexibility: Review your trust deed and ensure it provides the flexibility you need to manage changes in beneficiary residency status. In some cases, trust deeds can be amended, but this may specialist legal advice.
- Having a Property Investment Trust: There is potentially a way to have the best of both worlds. As a general example, if you are setting up a Trust to hold shares and other investments, you can have it open to all beneficiaries.If you decide to buy property in a Trust structure in the future in a State where there are extra costs for having foreign beneficiaries, you could create a separate property investing trust that excludes foreign beneficiaries.
Conclusion: Weighing the Pros and Cons
Excluding foreign beneficiaries from a discretionary trust can help avoid increased taxes and duties, particularly in states with strict surcharge regimes. However, this decision can also limit the flexibility of your trust, especially if key beneficiaries move overseas. It’s essential to carefully review your trust deed and consider your family’s long-term goals before making this decision.
We hope you’re enjoying our blog, just a note though. The information provided here is intended for general informational and educational purposes only. While we aim for accuracy, we can’t guarantee that this content will apply to your specific situation—every business owner’s circumstances are unique.
This blog is not a substitute for personalized advice from a qualified accountant, tax advisor, or any other professional. If you have questions specific to your individual circumstances, we strongly recommend consulting a professional for tailored advice.