These days trust deeds (Deeds) of family discretionary trusts (FDTs) frequently allow a trustee of a FDT to distribute to a trust as a beneficiary (TAAB) where the TAAB has a beneficiary or beneficiaries in common with the FDT. So could it be that, once a named beneficiary of the FDT has died, their deceased estate qualifies under a TAAB formulation in the Deed without need for alteration of the Deed.

Or a trustee of a FDT may just decide to distribute to a beneficiary who has died.

Valid gifts

Pursuing these aims may overlook an important principle. Beneficiaries of non-purpose trusts must be persons who are human (alive) or other legal persons e.g. companies. A clear expression of when a gift is valid is in Bowman v, Secular Society:

I think, well to bear in mind certain general and perhaps somewhat elementary principles. At common law the conditions essential to the validity of a gift are reasonably clear. The subject-matter must be certain; the donor must have the necessary disposing power over, and must employ the means recognized by common law as sufficient for the transfer of, the subject-matter; and, finally, the donee must be capable of acquiring the subject-matter. If these conditions be fulfilled, the property in the subject-matter of the gift passes to the donee, and he becomes the absolute owner thereof and can deal with the same as he thinks fit. The common law takes no notice whatever of the donor’s motive in making the gift or of the purposes for which he intends the property to be applied by the donee, or of any condition or direction purporting to affect its free disposition in the hands of the donee. It is immaterial that the gift is intended to be applied for a purpose actually illegal – as, for example, in trade with the King’s enemies – or in a manner contrary to the policy of the law – as, for example, in paying the fines of persons convicted of poaching. In either case, the essential conditions being fulfilled, the gift is complete, the property has passed, and there is an end of the matter. A gift at common law is never executory in the sense that it requires the intervention of the Courts to enforce it.

With regard to the conditions essential to the validity of a gift, equity follows the common law. On the one hand, if the subject-matter be property transferable at common law, equity will not as a rule aid a gift which does not fulfil the essential conditions. On the other hand, when the property is transferable in equity only, equity also requires that the subject-matter must be certain, that the donor must have the necessary disposing power, and must employ the means which equity recognizes as sufficient for a of the subject-matter, and that the donee must be capable of acquiring the subject-matter.

[1917] A.C. 406 per Lord Parker

This passage remains authoritative and was recently referred to in Grain Technology Australia Ltd v Rosewood Research Pty Ltd (No 3) [2023] NSWSC 238

Doctrine of lapse

This is comparable to and consistent with the doctrine of lapse which applies to testamentary gifts in Wills to persons who do not survive a testator by thirty days. Lapsed testamentary gifts under a Will to a legatee who is a child of the deceased who have children themselves are saved by statute and pass to his or her descendants so the gift won’t fail due to lapse: in NSW, section 41 of the Succession Act 2006.

So a gift to someone who has died generally fails.

Gifts to deceased estates

A gift to a deceased estate does not fail or necessarily fail where the deceased estate is a trust with a trustee. But before a will of a deceased person is proven and admitted to probate there is no trust.

These may be matters of consequence where the gift is litigated or in the event of a dispute with the Commissioner of Taxation. However specific tax rules can make the question of whether or not a gift fails inconsequential as the income tax legislation applies similarly where an Australian resident FDT attempts to distribute income to a resident deceased estate.

Income tax problems with distributions of trust income to deceased estates

An executor/trustee of an estate of a deceased person admitted to probate may or may not accept a distribution from a FDT. If the executor/trustee of the deceased estate (ETODE) accepts the distribution as a gift from the FDT, the trustee of the FDT and the ETODE face these income tax disadvantages:

• until there is a valid gift to a TAAB that exists no beneficiary of the deceased estate is presently entitled to a distribution of income from the FDT. So, even though a distribution of income by a FDT is made to immediately benefit deceased estate beneficiaries, sub-section 99A(4A) of the Income Tax Assessment Act (ITAA) 1936 applies to tax the trustee of the FDT on income of the FDT to which no beneficiary is then presently entitled at the highest personal rate of income tax where the deceased estate is not a trust by the end of the income year in which the distribution is made;
• in any case section 101A of the ITAA 1936 operates to ensure that income received by the trustee of a deceased estate, that would have been income of the deceased had it been received during the lifetime of the deceased, is treated as income of the FDT to which no beneficiary is presently entitled such that the income is taxed to the trustee of the FDT at the highest personal rate of tax under sub-section 99A(4A) – the same result; and
• on accepting the distribution the ETODE runs a risk that the Commissioner of Taxation will not exercise the discretion in section 99A(2) to apply the lower rates of income tax applicable under section 99 such that the highest personal rate of income tax can apply to income of the deceased estate to which no estate beneficiary is presently entitled in periods before the deceased estate is fully administered. This risk of denial of lower section 99 rates to a deceased estate arises in cases where an ETODE mixes property which the deceased held or was entitled to on their death with property that is not.

So an income distribution by a FDT to a deceased estate can not only attract the highest personal rate on the income to the trustee of the FDT. The integrity of the deceased estate and income tax on other income of the ETODE unrelated to the distribution can be impacted too.  

Conclusion

Reasons why a someone would want to make a gift to a deceased person after they have died or why a trustee of a FDT would want to make a distribution to a deceased estate TAAB are not obvious. Whatever they are they are unlikely to be tax effective.