When estate planning involves trusts, an important consideration is how to manage unpaid present entitlements (UPEs). A UPE arises when a trust has allocated income or capital to a beneficiary, but the funds have not yet been distributed. These entitlements can significantly impact the administration of an estate, particularly when they are not properly accounted for in a Will. Understanding how to deal with UPEs ensures that the testator’s intentions are carried out while minimising disputes and potential tax consequences.
What Are Unpaid Present Entitlements (UPEs)?
A UPE occurs when a discretionary trust distributes income or capital to a beneficiary, but the beneficiary does not immediately receive the funds. Instead, the entitlement remains as a liability of the trust to the beneficiary. In practice, UPEs often arise in family trusts where distributions are made to beneficiaries for tax planning purposes, but the funds remain within the trust.
While a UPE is a recognised entitlement, it is distinct from a loan. The beneficiary does not have a right to demand immediate payment unless specific provisions exist in the trust deed or related agreements.
How Do UPEs Affect an Estate?
UPEs can complicate estate planning and administration in several ways:
- Asset Allocation Issues – The value of a UPE needs to be determined as part of the deceased’s estate. If the testator intended to leave specific assets to beneficiaries, but a significant portion of their wealth exists as UPEs, there may be a shortfall in what was expected.
- Tax Considerations – The tax treatment of a UPE can vary depending on how it is structured. Mismanagement may result in unintended tax consequences for the estate or the beneficiaries.
- Trust Control and Succession – If a UPE is owed by a trust controlled by the deceased, the successor trustee’s role becomes crucial in ensuring that entitlements are managed as intended.
- Potential Disputes – If UPEs are not clearly addressed in the Will, beneficiaries may dispute their distribution, leading to lengthy and costly litigation.
Strategies for Addressing UPEs in a Will
To ensure UPEs are dealt with effectively, estate planning should involve careful structuring of trusts and clear instructions in the Will. Key strategies include:
1. Identifying and Documenting UPEs
Before drafting a Will, it is essential to document all UPEs, including details of amounts owed, the trust structure, and relevant trust deed provisions. This information helps ensure that UPEs are properly considered in the estate plan.
2. Using Specific Bequests or Equalisation Mechanisms
If certain beneficiaries are entitled to a UPE, but the estate contains other assets intended for different beneficiaries, the Will may include an equalisation mechanism. This ensures fairness, preventing disputes over perceived imbalances in distributions.
3. Incorporating Testamentary Trusts
A testamentary trust can be used to manage the distribution of UPEs. This allows greater flexibility in managing tax implications and ensures that funds are controlled according to the testator’s wishes.
4. Appointing a Suitable Trustee
If the deceased was the controller of a trust with UPEs, appointing an appropriate successor trustee is critical. The trustee should have the ability to manage the trust responsibly while considering the interests of the estate and beneficiaries.
5. Reviewing and Updating the Estate Plan
As trust distributions and UPEs can change over time, estate plans should be reviewed periodically. Changes in tax laws, financial circumstances, and trust structures should be considered to ensure the Will remains effective.
Key Considerations for Executors
If a UPE exists at the time of death, the executor must determine how it should be treated. This may involve:
- Confirming the Value of the UPE – Working with accountants or financial advisors to establish its value.
- Determining Beneficiary Entitlements – Ensuring that distributions align with the terms of the Will.
- Assessing Tax Liabilities – Considering whether the UPE gives rise to any tax obligations.
- Communicating with the Trustee – Liaising with the trust’s controller to facilitate the appropriate transfer or management of funds.
Final Thoughts
Unpaid present entitlements can introduce complexity into estate planning and administration. Addressing them effectively requires a proactive approach, incorporating trust structures into the broader estate plan. By ensuring clear documentation, strategic asset allocation, and appropriate trustee appointments, testators can reduce uncertainty and safeguard their legacy. Seeking professional legal and financial advice is essential in navigating these issues and ensuring a smooth estate transition for beneficiaries.
If you have trusts or unpaid present entitlements in your estate planning, it’s important to get the right advice to protect your assets and ensure your wishes are carried out. Contact our experienced team at Perspective Law to discuss your estate planning needs today.