WHO TO EXCLUDE
Trusts are about including people or purposes (“Objects”) to receive benefits.
Trustees are usually excluded, so as to exclude conflict between their interests and duties.
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There are various Trust estate planning reasons to exclude certain Objects. In the same way that you do not extend an invitation to the whole neighbourhood to attend a private party.
Many tax jurisdictions around the world engage in statutory fiscal engineering: if the trust is to have a certain tax profile, then the Trust must exclude certain categories of Objects.
AUSTRALIA
State governments impose tax surcharges when the Family Trust holds residential land in that state. Family Trusts have ‘foreign’ beneficiaries because the class of beneficiaries is so widely defined in a modern Family Trust. Most Family Trusts have over 400,000 beneficiaries, according to https://legalconsolidated.com.au/
What is a ‘foreign person’?
What makes a person ‘foreign’? Each state answers that differently.
Generally, a human is a ‘foreign person’ if they are not:
- an Australian citizen; or
- the holder of a permanent Australian visa.
An entity (non-human) is a ‘foreign person’ if it (does not ordinarily reside in Australia):
- is a foreign corporation (company) or
- the trustee of a foreign trust.
While not a legal definition and has no force of law, NSW Revenue helpfully explains:
You are generally considered a foreign person, unless:
- you are an Australian citizen, or you have lived in Australia for 200 days or more in the 12 months prior to the taxing date of 31 December, and
- you are a permanent resident of Australia.
So, the Trust Deed should mirror with express Exclusions these categories.
CHANGING FAMILY DYNAMIC
https://www.lexology.com/library/detail.aspx?g=808f88a6-eeb6-4194-9f6c-ac6bc82046d5
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.
UK and USA
Settlor Interested Trusts are “tax transparent”. If the Trust can benefit the Settlor, then the Settlor is subject to tax as if the Trust did not exist.
Where the Trust Founder is a company, the rules are different:
GAAP (Generally Accepted Accounting Principles) have never been adequately drawn so as to reflect Trust Law. Where assets are held by a trust those assets are not legally within the power of the Corporate Founder. Yet GAAP refuses to recognise this fundamental legal principle.
· So, Corporate Founder will expressly exclude from benefit the Corporate Founder.
· Shareholders in the Corporate Founder will be excluded, for the same reason.
EMPLOYEE TRUSTS
The UK has a particular regime for employee benefit trusts established by a Corporate Founder.
The main legislation is at IHTA 1984:
https://www.legislation.gov.uk/ukpga/1984/51/section/13
https://www.legislation.gov.uk/ukpga/1984/51/section/28
The UK tax authority (HMRC) had a Consultation on proposals both to tighten and lighten these regimes. This reported on 30 October 2024:
https://www.gov.uk/government/consultations/taxation-of-employee-ownership-trusts-and-employee-benefit-trusts/taxation-of-employee-ownership-trusts-and-employee-benefit-trusts
The legislation was enacted in Finance Act 2025 at sections 58 to 60:
https://www.legislation.gov.uk/ukpga/2025/8/contents
The regime exempts transfers into such trusts from the UK’s lifetime capital tax (IHT). Essentially, the regime is geared around Excluded Persons. It must be employees who can benefit, not the shareholder or their family (“connected persons”). The amendments are said by HMRC to make express provision, that such exclusions must be for the lifetime of the Trust.
So, the Trust Deed should mirror with express Exclusions these categories.
The regime has been relaxed so that, instead of a majority of employees as beneficiaries, only 25% now need to be beneficiaries.
As with most jurisdictions, to include the family and fiscal benefits available from a Trust, requires excluding persons.