Unpaid Present Entitlements and Estate Planning

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Last week, we looked at the ATO’s increased attention on unpaid present entitlements (UPEs) and arrangements that take the form of UPEs but which in substance are really financial accommodation.

Quite apart from the ATO’s looming ruling on the topic (currently draft Taxation Ruling TR 2022/D1), there are many other scenarios in which UPEs can pose challenges. In particular, their use in a family can generate unexpected estate planning complications.

Consider this example…

A husband and wife operate a business through a family trust. The trust represents one half of the value of the estate. Wishing to distribute their notional estates equally between their two children, the parents deliver control of the trust to their first child while leaving the balance of their other assets to the second child.

Unfortunately, mum and dad accumulated significant UPEs in the trust. These UPEs now become an asset of their estates (of which the second child is sole beneficiary). That child calls on the UPEs, which are paid from the trust. The trust’s value is reduced and the intended 50/50 split between the two children is ruined. 

Other Complications 

Even when UPEs are distributed evenly between family members, challenges arise.

A high-earning beneficiary may be happy to see payment of inherited UPEs deferred, while another beneficiary with debt or pressing personal or family needs may want UPEs paid immediately. Where those UPEs take the form of unpaid company dividends, it may not be possible to make payment to the latter individual without making payment to the former. 

These scenarios may be managed with good advice. For instance, a discretionary trust as shareholder can help manage the streaming of dividends from a family company. Testamentary trusts established under a will can also help stagger payments between beneficiaries.

If you would like to discuss this important issue, feel free to contact Aintree Group Legal via email at legal@aintreegroup.com.au or by calling 03 9851 7999.