Tuesday, September 2, 2014

Cascading testamentary trusts and stamp duty risks

With thanks to co-director View Legal Patrick Ellwood, today’s post looks at an estate planning approach that is often raised, namely the use of ‘cascading’ testamentary trusts.  The structure usually involves a single testamentary trust being established upon the death of one spouse, which then ends and ‘cascades’ into multiple testamentary trusts (usually one for each child) upon the death of the surviving spouse.

This strategy is intended to avoid the issues that can arise where clients ultimately want their children to receive control of separate shares of their estate, while minimising the potential burden for their spouse with the administration of multiple trusts while they are alive.
Previous posts confirm that there should be no tax consequences of the cascading trust approach, for example see Do ‘cascading’ testamentary trusts cause a tax problem and Taxation consequences of testamentary trust distributions - Part II.

Although the ‘cascading’ trust structure can be useful in some circumstances, it is vital to consider the risk that stamp duty will normally apply on the transfer of assets from the original testamentary trust to the separate trusts for the children. The stamp duty rules are different in each jurisdiction, however will usually be around 5% of the value of the assets being transferred.

An alternative approach is to establish a single trust on the death of the first spouse, and ensure the terms of that trust are broad enough to allow capital distributions to be made to other trusts.  This means that, if the stamp duty cost can otherwise be managed, the trustees can ‘split’ the assets of the trust into separate trusts at the appropriate juncture by way of a capital distribution.

A further alternative is to simply establish multiple testamentary trusts on the death of the first spouse and ensure the trustee of each trust (normally the surviving spouse) is empowered to administer all trusts as if they were a single trust.  This approach generally provides the most flexibility and ensures there will be no unnecessary stamp duty costs.

The perceived complexities of using multiple trust are normally not significant if the same trustee acts as trustee of each trust certainly no more complex than (say) 2 individuals owning a house, which is obviously very common.

Until next week.

Image credit: sarahgb cc