Can A Trust Be A Beneficiary Of Another Trust?

If you run a business through a trust (or you’re thinking about it), you’ve probably heard that trusts can be a powerful way to manage assets, distribute income, and plan for the future. But once you start dealing with multiple entities - like a trading trust, a family trust, a unit trust, or a holding trust - a common question comes up fast:

Can a trust be a beneficiary of another trust?

In many situations, the answer can be “yes” - but only if it’s done properly and the documents support it. If it’s structured poorly (or not allowed under the trust deed), you can create major tax issues, disputes between controllers, and even invalidate intended distributions.

Below, we’ll walk you through what Australian business owners and trustees need to understand before making one trust a beneficiary of another trust, including common structures, key risks, and what to check in your trust deed. This article is general information only and isn’t tax advice - for tax outcomes in your specific circumstances, you should speak with your accountant or tax adviser.

What Does It Mean For One Trust To Be A Beneficiary Of Another Trust?

In simple terms, a trust is a legal relationship where a trustee holds assets (like cash, shares, or business interests) on behalf of beneficiaries.

When we say a trust is a beneficiary of another trust, we’re usually talking about this type of arrangement:

• Trust A (the “distributing trust”) earns income or realises capital gains.
• The trustee of Trust A decides to distribute some of that income or capital to a beneficiary.
• That beneficiary is Trust B (the “beneficiary trust”).

Practically, this can mean the trustee of Trust A resolves to:

• distribute trust income to Trust B; and/or
• distribute capital (or capital gains) to Trust B.

Trust B then holds that entitlement (or receives the money/assets) and its trustee manages it for Trust B’s beneficiaries.

This kind of “trust-to-trust distribution” is often used in business structuring, asset protection, succession planning, and profit distribution strategies - but it’s not something you should do casually.

So, Can A Trust Be A Beneficiary Of Another Trust In Australia?

In many cases, the answer is yes: a trust can be a beneficiary of another trust in Australia.

However, whether it works in your situation depends on a few critical factors:

• What the trust deed says for the distributing trust (does it allow trusts as beneficiaries?).
• What type of trust you’re dealing with (discretionary trust, unit trust, testamentary trust, etc.).
• Who controls each trust (trustee, appointor, directors if a corporate trustee is used).
• Tax treatment of the distribution (which depends on the details of both trusts and the nature of the amounts being distributed).
• Practical enforceability (whether the distribution is properly resolved, documented, and accounted for).

The most important point is this: the trust deed must support the arrangement. If Trust A’s deed does not allow Trust B to be a beneficiary, the trustee may not have power to distribute to Trust B at all.

If you’re setting up (or updating) your structure, it may also be worth checking whether you need to amend governance documents around your corporate trustee (if relevant), such as a Company Constitution, so that decision-making lines up with the trust’s control requirements.

Why The Trust Deed Matters So Much

In Australia, trust law is heavily document-driven. The trustee’s powers are set out in the deed, including:

• who can be a beneficiary;
• how distributions must be made (and when);
• any restrictions on income or capital distributions; and
• how the trust can be varied (if at all).

This is why you’ll often hear lawyers say: the trust deed is the rulebook. If the deed doesn’t permit it, the trustee generally can’t do it.

Common Scenarios Where Trust-To-Trust Beneficiaries Are Used In Business

Australian small businesses use trust-to-trust beneficiary arrangements for all sorts of legitimate reasons. Here are some of the most common structures we see.

1. A Trading Trust Distributing Profits To A Family Trust

Some businesses operate through a trust (often a discretionary trust) as the trading entity, then distribute profits to another trust (often a family trust) as part of the overall family group structure.

This can be done to help centralise distributions or align income with family planning (subject to the deeds and tailored tax advice).

2. A Unit Trust With Another Trust As A Unitholder

Instead of being a beneficiary of a discretionary trust, Trust B might hold units in a unit trust. In that case, Trust B receives distributions in proportion to its units.

This structure can appear in joint ventures and business partnerships where different family groups want exposure to a venture through their own trusts.

3. A Family Trust Distributing To An “Investment Trust”

Sometimes a group uses one trust for operating and another trust as a passive investment vehicle.

For example, the trading entity might distribute funds to an investment trust that then buys shares, property, or other assets. The goal is often to separate operational risk from long-term assets (subject to proper legal and tax structuring).

4. Multi-Trust Groups With Corporate Trustees

Many business owners choose corporate trustees for asset protection and administration reasons. Where a company acts as trustee, it’s especially important to clearly document who has control and what decisions require approval.

If you have multiple controllers (for example, co-founders or family members involved in trustee companies), it may be worth tightening governance with a Shareholders Agreement so decision-making about trust distributions and trustee actions doesn’t become a dispute later.

Key Legal And Tax Risks To Watch Before Making A Trust A Beneficiary

Even when it’s allowed under the deed, distributing from one trust to another can create risk if it’s not carefully handled. The biggest issues usually fall into a few categories. This section is general information only - you should get tax advice on how any distribution will be assessed in your circumstances.

1. “Is The Beneficiary Trust Actually Eligible Under The Deed?”

Not all discretionary trust deeds automatically include other trusts as potential beneficiaries. Some deeds limit beneficiaries to:

• named individuals;
• companies related to those individuals; or
• a defined class (like “children of X” or “spouses of Y”).

If the deed doesn’t include trusts as beneficiaries (or doesn’t define the class broadly enough), a distribution to another trust may be invalid (or may need to be undone and re-documented).

2. Correct Trustee Resolutions And Timing

Trust distributions must usually be properly resolved by the trustee. Many trust deeds require resolutions to be made by a particular time (often by 30 June, but it depends on the deed). If the trustee resolution is late, missing, or inconsistent with the deed, you may get “default beneficiary” outcomes or have income taxed in an unexpected way.

In practice, good administration is just as important as good structure.

3. Unpaid Present Entitlements (UPEs) And Cashflow Confusion

Sometimes Trust A “distributes” income to Trust B on paper, but doesn’t actually transfer cash. This can create an amount owed by Trust A to Trust B (often referred to as an unpaid present entitlement, depending on the trust terms and circumstances).

These arrangements can become messy when:

• the trustees change;
• there’s a dispute in the family group;
• the trading business needs cash but distributions are booked out; or
• external financiers want clean financials.

If you’re trying to keep things commercially clear, you may need proper inter-entity documentation and accounting treatment (and tax advice on any associated implications).

4. Tax Treatment Can Be Complicated (And Can’t Be Assumed)

Trust-to-trust distributions can have tax consequences depending on:

• whether Trust B is discretionary or fixed;
• whether Trust B distributes out to individuals (and who);
• the nature of the income (business income, franked dividends, capital gains); and
• how the distribution is characterised under the deed.

It’s important not to assume you can achieve a particular tax outcome (including passing through specific “types” of income) without checking the deed and getting tailored tax advice. Your accountant should be involved, and your deed drafting should support what you’re trying to do.

5. Control And Succession Risk (Who Really “Owns” The Decision?)

Trusts don’t have owners in the same way a company has shareholders. Control usually sits with:

• the trustee (and directors if the trustee is a company); and
• the appointor/principal (depending on the deed).

If Trust A distributes to Trust B, you’re effectively shifting value into another vehicle. If Trust B is controlled by a different person or branch of the family, that might be intended - or it might be an accidental loss of control.

This is one of the most common “it looked simple on paper” problems we see in multi-entity structures.

What Should You Check In The Trust Deeds Before Doing It?

Before you treat a trust as a beneficiary of another trust, you should review both deeds - the distributing trust’s deed (Trust A) and the beneficiary trust’s deed (Trust B).

Here are the key questions to work through.

Does Trust A’s Deed Allow A Trust To Be A Beneficiary?

Look for definitions like:

• “general beneficiaries” including companies and trusts;
• “eligible beneficiaries” including entities controlled by named individuals; or
• a power for the trustee to “add” beneficiaries (and how this must be done).

If the deed is silent or restrictive, it may need a variation (if the deed permits variation and the correct process is followed). Variations need to be handled carefully, because changes that go beyond the deed’s variation power can be ineffective and may also have tax consequences.

Are There Any Exclusions Or Family Trust Election Considerations?

Some deeds and tax elections can create practical limits on who should receive distributions, even if the deed technically allows it. For example, if a trust has made a family trust election (or is intended to operate as a “family trust” for tax purposes), distributing outside the relevant family group can trigger additional tax.

This is one area where legal structuring and tax advice need to line up.

Does Trust B Have Power To Receive And Hold The Distribution?

It sounds obvious, but Trust B’s deed should also support:

• receiving distributions;
• holding certain asset types; and
• treating receipts properly as income or capital within Trust B.

For example, if Trust A distributes capital (or assets) to Trust B, Trust B should have the power to hold those assets and manage them for its beneficiaries.

Are The Trustee And Appointor Roles Clear In Each Trust?

If there’s any ambiguity about who can make decisions, you’re increasing the chance of disputes. In some cases, it’s sensible to document related arrangements (especially in a group structure) so that key people understand how decisions will be made.

If you’re in a multi-party arrangement (like co-founders), you might also consider whether a broader business structure document - such as a Founders Agreement - is needed to keep expectations aligned across the group entities.

What Legal Documents Might You Need For A Multi-Trust Structure?

When businesses run multiple trusts (and especially when one trust is a beneficiary of another), having the right documents in place can prevent misunderstandings and reduce risk.

Not every business will need all of the following, but these are common documents we recommend considering.

• Trust deed review / update: the deed needs to allow the intended beneficiary classes and distribution powers, and the control mechanisms should reflect how you actually operate.
• Company Constitution: if you use a corporate trustee, a well-drafted Company Constitution can help ensure the company’s internal rules support trustee decision-making (and avoid deadlocks).
• Shareholders Agreement: if a trustee company has multiple shareholders/directors, a Shareholders Agreement can set out voting thresholds, dispute pathways, and what happens if someone wants to exit.
• Inter-entity documentation: if trusts are lending money to each other, sharing staff, or dealing with IP between entities, consider documenting the arrangement clearly so the commercial and legal position matches what’s happening in practice.

The big picture is that multi-trust structures tend to work best when the legal documents match the real-world operation of the group. If your paperwork doesn’t reflect how money flows and who makes decisions, problems often show up later (often at tax time, when selling the business, or when there’s a dispute).

Key Takeaways

• In Australia, a trust can be a beneficiary of another trust in many cases, but it depends heavily on what the distributing trust deed allows.
• Before making a trust-to-trust distribution, you should check the distributing trust’s deed for beneficiary definitions and any restrictions on who can receive income or capital.
• Multi-trust structures can be useful for business structuring and asset planning, but they can also create control, documentation, and cashflow complexity if not set up properly.
• Trust distributions need to be correctly resolved and documented, and you should be careful about issues like unpaid entitlements and inconsistent administration (and get tax advice on the implications).
• Good supporting documents (like a Company Constitution for corporate trustees or a Shareholders Agreement where there are multiple controllers) can help prevent disputes and keep the structure running smoothly.

If you’d like help reviewing your trust deed or setting up a multi-trust structure for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.