Monday, April 23, 2012

Do ‘cascading’ testamentary trusts cause a tax problem

With thanks to the Television Education Network, there will be a series of posts over the next period of time where excerpts from a recent video presentation I have provided will be the basis of the post.

Each week, I will also include a transcript of the presentation for those that cannot (or choose not) to view the presentation.

The first excerpt posted today is under the title ‘Do ‘cascading’ testamentary trusts cause a tax problem’ at the following link -

As explained at the above link -

Under Division 128 of the 1997 Tax Act, the concept of an asset passing from a will maker or the executor into the estate is absolutely certain that that transfer of wealth is not subject to any capital gains tax.

Where some confusion arises, particularly in relation to cascading trusts or master trusts, is that the language under Division 128 is a little bit obscure or a little bit uncertain as to exactly what is going to happen once the assets have passed into the estate. So in other words, the transfer from the will maker to the legal personal representative, absolutely no capital gains tax.

The transfer from the legal personal representative or the executor down into an initial testamentary trust, again absolutely no capital gains tax.

The confusion then arises that is it the case that from the testamentary trust to a beneficiary, particularly if that beneficiary happens to be another testamentary trust, will that transfer be without capital gains tax?

On a plain reading of Division 128, there is little question that that transfer of subsequent assets, even if it is to another trust, will be free of capital gains tax. But there has been, I guess for many years now, a level of uncertainty about that, simply because of the language used under that particular division.

Until next week.

Tuesday, April 17, 2012

Settlement sums

Last week, following on from the post before Easter, we had a enquiry about the consequences of a failure to deposit the settlement sum on the establishment of a discretionary trust.

This area of the law is potentially complex, however ultimately the conservative position is that the settlement sum should always be deposited into the trust’s bank account, and ideally, it should in fact be the first deposit.

The approach of placing the settlement cheque (or a cash equivalent of it) on the file for the trust can be problematic for a range of reasons, including:

1. Where the settlement sum is by way of cheque, the cheque will normally go stale after 13 months; and

2. Even where cash is stored with the trust, it is difficult to provide documentary evidence of the settlement sum forming part of the trust if the cash is lost.

Ensuring that the settlement sum is deposited into the bank account of the trust at least avoids each of these two issues.

Until next week.