Beneficiary Current Account Balances – The Practical Implications

One thing we see a great deal with trusts that have been around for a while is high beneficiary current account balances where the trustees owe beneficiaries quite significant amounts of money. This has come about through trust income being distributed to beneficiaries who have a lower marginal tax rate as the trustee, i..e income splitting. Even though the trust income has been distributed the beneficiary never received the funds and they were recorded as a loan to the beneficiary in the beneficiary current account. Sometimes these balances can be large – over $500,000 in a few circumstances.

These amounts the trustees owe the beneficiaries can cause some serious practical implications as follows:

The amounts are repayable on demand. This means if a beneficiary asks the trustees to repay it they must.
The amount is an asset in the hands of the beneficiary and should be taken into account when the beneficiary fills in any statement of assets and liabilities, for example when applying for bank loans. The difficulty here is the beneficiary has no idea they are actually owed the money!
The options to deal with this are limited. We have heard of some accountants wanting to ‘gift’ off the balances through journal entries which is not advisable as the only person who can actually gift the balances are the beneficiaries. Also, there is an added complication that if the beneficiaries gift the balances they will also be considered a settlor of the trust under trust law principles.

The best course of action is to be open with the beneficiaries. With the proposed changes to New Zealand’s trust they are going to be able to obtain this information in any event, assuming there are no further changes before it is finally passed by Parliament. Sit them down and tell them they are owed money but the trust cannot pay it back but it will be paid back in the future.