In-house loans and estate planning – not as simple as it seems

In-house loans and estate planning – not as simple at it seems

 

Dealing with loans in the context of an estate plan is often not as simple as it may seem. This is particularly so when the loans have been made to and from ‘entities’ within the family group. The effect of these loans can be to completely up-end the intended estate planning strategy, i.e. wealth can end up in the wrong hands.

In-house loans

A loan is either an asset or a liability. It is an asset when you have lent money to another person, or to one of the entities within your family group. It is a liability when someone else has lent you the money, for example a bank, or when you have taken money out of an entity within your family group.

While you are alive you are controlling the entities within your family group, i.e. you are effectively loaning money to and from yourself. However, on your death, the debtor and creditor may end up being completely different people – who may have reason not to get along.

It is quite common for companies to make loans to shareholders, as opposed to paying dividends. Everyone is aware of the Division 7A issue that arises here, but there are also important estate planning concerns. If control of the company is given to one person, and the residual estate (from which the loan is repayable) to another, then the controller of the company may demand repayment. This may put the estate under financial stress. Similarly, if the company owes the shareholder money, the estate may demand repayment of the loan and put the company under financial stress.

We can help you to document the terms of these in-house loans, to ensure that the debtor has time and ultimately the capacity to repay and to ensure your estate planning doesn’t lead to unintended consequences, call 1300 654 590 or email us.

Unpaid present entitlements (UPEs)

Companies are likely to be just one aspect of your overall business structure. As an asset protection and tax structuring strategy, you may also have discretionary or family trusts.

The financial arrangements of family trusts need to be considered when doing your estate planning. An unpaid present entitlement arises when the trustee makes a distribution of income or capital to a beneficiary, but keeps the cash referable to that distribution. The distribution is left ‘unpaid’ and essentially ‘lent’ back to the family trust. However, to make the distribution effective for tax purposes, the beneficiary must be ‘presently entitled’ to the distribution. This means that the beneficiary must have the legal right to immediately demand payment of the amount from the trustee. To achieve this outcome, the trustee resolves before the end of the financial year to irrevocably distribute the income to the beneficiary.

So why are unpaid present entitlements so important?

There are a couple of contexts in which you need to be careful with these UPEs.

The first is Division 7A. If the trustee distributes income to a company (to cap the rate of tax at 30% – read our article about ‘bucket companies’), but keeps the cash in the trust (or makes the cash available to a different beneficiary), then Division 7A can raise its ugly head. This is because the company has paid tax on the income, but someone other than the company has use of the cash (i.e. the trustee or other beneficiary). This can result in a ‘deemed distribution’ by the company to the trustee (or other beneficiary). Division 7A is a whole topic in itself. But take our word for it, if you inadvertently trigger this division, then tax of around 64% can arise.

The other circumstance in which UPEs can cause issues is in your estate planning. A UPE owed to an individual is an ‘asset’ of that individual – and a ‘liability’ of the trust. This is because the individual can demand payment of the UPE from the trust. Often people use trusts to pass assets to the next generation without the assets passing through their personal estate. However, if there is a UPE outstanding from the trust to the individual, then the UPE will go through their personal estate. This can open up estate challenges and other unintended consequences – you can get a better understanding of this issue by reading this article.

How we can help

If you have a business structure with inter-company loans or trusts with UPEs, you need to consider how they will impact on your estate planning. For advice about inter-company loans and estate planning, call 1300 654 590 or email us for a no-obligation and confidential chat.

 

The information contained in this post is current at the date of editing – 01 May 2025.

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Advising under an EPOA: Know your duties and risks

Advising under an EPOA: Know your duties and risks

As a professional adviser, you may have been instructed to manage personal wealth matters for clients in a way that benefits not only your client but also their families.  Your client, like Mary, may have routinely provided regular financial support to their family – adult children, grandchildren, spouses, or even elderly parents. This support can be informal but deeply entrenched, often continuing for years. 

But what happens when your client loses capacity, and their Enduring Power of Attorney (EPOA) takes effect? 

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