Forgive Family Trust UPEs – no tax consequences
Your Family Trust distributes $30,000 to your daughter each year for 10 years. Your Family Trust pays the tax of $2,000 per year on behalf of your daughter. Therefore, there is an ‘Unpaid Present Entitlement’ (like a debt). Your Family Trust owes your daughter $280,000. An ‘Unpaid Present Entitlement’ is the money that the Family Trust owes the beneficiary. You must get her to forgive Family Trust UPEs regularly.
Your daughter, of course, never gets any of this money. You just used her low marginal tax rates to pay less tax. Your accountant reminds you that your daughter (or her ex-husband or trustee in bankruptcy) can now ask for that money. After all, it is her money.
To get rid of the debt she signs a Deed of Debt Forgiveness. There are no tax issues when forgiving the debt. Get her to sign the same Deed of Debt Forgiveness each financial year. Therefore, if your daughter goes bankrupt, feral, divorces or dies your Family Trust owes her nothing.
Have a son? Have other children? Distributed to yourself? Build a separate Deed of Debt Forgiveness for each of you.
What is a Deed of Debt Forgiveness?
The Borrower owes you money. In the Deed of Debt Forgiveness, you forgive the debt for ‘love and affection’. The debt has gone. The borrower no longer owes the lender any money.
Income Tax implications
Issues when you forgive Family Trust UPEs:
* is a deduction for the release of debt is available?
* do the commercial debt forgiveness penalties apply?
* any FBT?
The answer to all questions is ‘no’. See the Sample to read our letter of advice.
Commercial Debt Forgiveness and ‘love and affection’
Division 245 ITAA 1997 sets out the tax for a debtor. This is when a commercial debt is forgiven.
However, when you forgive Family Trust UPEs for ‘natural love and affection’ the commercial debt rules don’t apply (section 245-40). Our Deed of Debt Forgiveness is drafted by us on that basis.
When do Reimbursement Agreement rules apply to forgive Family Trust UPEs?
We do not use Reimbursement Agreements to forgive Family Trust UPEs. They don’t work. See the Sample above to read our letter of advice on this.
Any Stamp Duty?
You do not need to lodge this document in the ACT, WA, VIC, NSW, TAS, NT, QLD or SA. There is no duty payable in those States.
How do I record forgiveness of debt in the accounts?
When you forgive Family Trust UPEs there is neither income nor a taxable capital gain. They have no tax consequences. The forgiven amount ends up in the trust corpus. For the accounts, to be true and useful, the accounts should reflect this. The letter of advice provides the Journal Entries.
Update the Family Trust for Bamford streaming only:
Or, update Bamford streaming PLUS update the rest of the Deed:
Or update for Bamford streaming PLUS the Deed PLUS update the Appointor & Trustee:
Or just update the Trustee:
Or just update the Appointor:
To deal with Division 7A (loan or UPE from your company to the Family Trust):
Or, to forgive the ‘loan account’ and UPEs (loans from humans to Family Trust):
Change the name of your Family Trust:
To wind up and vest the Family Trust, when you no longer want it:
Telephone us for legal advice on building this document.
Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
National Australian law firm
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