Trusts are a widely used estate planning tool. They can protect assets, provide tax flexibility and help support vulnerable beneficiaries.
However, Australia’s foreign investment and state tax rules can create unexpected complications where a trust includes a foreign person as a beneficiary. This issue commonly arises in testamentary trusts created under wills, family discretionary trusts and other trust structures.
If not carefully drafted, a trust that includes a foreign beneficiary may be treated as a foreign trust, potentially triggering additional tax obligations and regulatory requirements.
Understanding how these rules operate is an important part of modern estate planning and assets protection.
When is a Trust Considered a “Foreign Trust”?
Under Australian foreign investment and state revenue laws, a discretionary trust may be classified as a foreign trust if a foreign person is a beneficiary or could potentially benefit from the trust.
A foreign person generally includes individuals who are not Australian citizens or permanent residents, as well as certain foreign corporations or entities.
This may include situations where:
- A beneficiary lives overseas
- A beneficiary is not an Australian citizen or permanent resident
- The trust includes a broad class of future beneficiaries who may live overseas in the future
Importantly, a trust may be treated as foreign even if no distributions are actually made to a foreign beneficiary. The mere possibility that a foreign person could benefit from the trust may be sufficient.
Many older wills and trust deeds contain very broad beneficiary definitions that unintentionally trigger this risk.
Why This Matters
If a trust is considered as a foreign trust, several consequences may arise depending on the circumstances and the state in which the property is located.
These may include:
- The need to apply for Foreign Investment Review Board (FIRB) approval before acquiring certain property
- Significant government application fees
- Additional foreign surcharge land tax or transfer duty in some states
- Delays in administering the estate or transferring property
- Restrictions or conditions on property ownership
These issues can create unexpected costs and complications for executors, trustees, and beneficiaries.
The Importance of “No Foreign Beneficiary” Clauses
Since 1 January 2021, many testamentary discretionary trusts holding residential land in several Australian states may be treated as foreign trusts if foreign persons are included as potential beneficiaries.
To address this risk, modern wills and trust deeds increasingly include “no foreign beneficiary” clauses.
These provisions prevent distributions to foreign persons and restrict the class of beneficiaries so the trust is not automatically treated as a foreign trust under state revenue legislation.
For wills executed after 1 January 2021, it is often critical to include appropriate drafting to ensure the trust does not unintentionally trigger foreign trust rules.
Reviewing Existing Wills and Trusts
Trusts created before 1 January 2021 may not contain the drafting protections now commonly used to prevent a trust from being classified as foreign.
As a result, some existing estate plans may benefit from a review of wills and trust structures to ensure they remain effective and do not expose beneficiaries to unintended tax consequences.
Where necessary, amendments or updated estate planning documents may be required.
A Common Example
A will creates a testamentary trust for the benefit of children and grandchildren.
At the time the will was written, the children lived in Australia. However, one child later moves overseas permanently and becomes a foreign resident.
Because that individual remains a potential beneficiary of the trust, the trust itself may be classified as a foreign trust under certain legislation.
This classification may affect the trust’s ability to acquire or retain property and may expose the trust to additional taxes or regulatory requirements.
Risks for Executors and Trustees
Executors and trustees need to carefully consider foreign trust rules when administering estates and managing trust property.
Issues can arise if:
- Property is transferred to a trust without considering FIRB requirements
- Foreign beneficiaries are not identified early
- FIRB or state revenue requirements are overlooked
These issues can delay estate administration increase costs.
When to Seek Legal Advice
You should seek legal advice if:
- You are preparing or updating your will and have beneficiaries living overseas
- Your will includes a testamentary trust
- You are an executor managing an estate that includes property and foreign beneficiaries
- You are a trustee of a discretionary or testamentary trust holding property
- Your circumstances or the residency status of beneficiaries has changed
Early advice can help avoid delays, costs and compliance issues.
How W & G Lawyers Can Help
At W & G Lawyers, we assist clients with structuring their wills and trust arrangements to avoid unexpected foreign investment and taxation issues.
We can assist with:
- Drafting and reviewing wills
- Structuring testamentary trusts
- Advising executors and trustees
- Managing estate administration
Visit or Contact Us
📍 68 Bryants Road, Shailer Park QLD 4128
📞 (07) 2810 5666
🌐 www.wglawyers.com.au
✉ info@wglawyers.com.au
Disclaimer
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The content should not be relied upon as a substitute for obtaining legal advice from a qualified legal practitioner. Readers are encouraged to engage a lawyer to obtain advice tailored to their specific circumstances. You may contact our office or locate a solicitor through the Queensland Law Society online directory at https://www.youandthelaw.com.au/directory
This article does not take into account all potential future legislative amendments, regulatory changes, or developments in case law. Accordingly, the content may not reflect subsequent changes in the law and should not be relied upon as legal advice for any particular situation.
This article will not be updated after publication. Any subsequent developments in the law or legislative changes may be addressed in separate future publications.