I am dealing with a Discretionary Trust which has shares in the family company. A few years ago a revocable deed created life interests split in equal shares for the four grandchildren beneficiaries.
The shares in the company held by the Trust are all one class. The Trustees have notified me that different dividend payments were made in the last year to the beneficiaries. The only way this would be possible that I can see within the remit of the legal documents would for there to have been a dividend waiver. The shares are owned by the Trustees with a legal right over the income to the grandchildren so would it be the Trustees who would have waived or the beneficiary entitled otherwise to a higher dividend? Is it even possible?
In the absence of some form of appropriation, I don’t think it would be possible. Only the T’s could waive a dividend and presumably they would then still have to divide the remaining dividend in the usual proportions.
A viable interpretation might be that some beneficiaries gifted part of their shares to the others, but that would not effect the income tax position.
Thank you Andrew. The split point was my first thought too in that if you just split the total income four ways then waiving would not reduce one proportion but across the holding evenly. The client has since stated that their understanding is that the life interest is over a quarter of underlying assets and income arising on that specific quarter, then I presume if the Trustees waive on those specific shares then the dividend which is paid is on the other shares remains as declared.
However, as they are all one class of share how you can waive on some of the same class but not on the others would seem to be a corporate legal question which is outside of my expertise. They put the structure in place a few years ago so it would have been far easier if at the time they had reclassified the shares into four different classes and then the deed would assign the life interest over a specific class for each separate beneficiary. Any difference would then be dealt with by declaring a different dividend for that class with no waiving.
Waiving dividends always seems to go against the Trustees obligations for the beneficiaries to me.
Regrettably the way to do this is different classes of shares. I know of one currently with an Australian branch of the family and a separate class of shares can be tailored to their specific status. The cost/benefit analysis of multiple classes and differential dividends is not always favourable.