Friday, February 19, 2021

Don't know what you got 'til it's gone** - testamentary trusts and ETY



Thank you to all those who were part of our Estate Planning 2021 webinar this week.

A key question discussed related to the way in which the new restrictions on excepted trust income (ETY) via testamentary trusts operate.

In particular, in the context of a husband and wife preparing wills incorporating Testamentary Trusts, are there any tax consequences that flow from preparing the husband and wife’s wills to reflect that in the event the husband predeceases the wife (for example) the wife’s will provides that her assets will be gifted into the Testamentary Trust previously set up under the husband’s will.

Focusing solely on the ETY position, the new rules unfortunately make it clear that in this situation the income earned on the wife’s assets gifted to the husband’s Testamentary Trust will not give rise to ETY.

The reason for this is that the legislation mandates that the ‘property (must be) transferred to the trustee of the trust estate to benefit the beneficiary FROM THE ESTATE OF THE DECEASED PERSON concerned’ (emphasis added).

View made submissions on the draft legislation on this point (which were ignored ...) as follows:

‘The draft legislation is focused on “the deceased person concerned”, and it is unclear why this restriction is relevant.

For example, for most couples who both implement testamentary trusts, it will be the case that they will die at different times and there will often be a desire to transfer assets between testamentary trusts.

It is clearly the case that the excepted trust income rules should continue to apply in situations where a couple both implement testamentary trusts.

To argue otherwise would again see the proposed amendments extend significantly beyond the stated intent of the announced measure and impact taxpayers in a range of circumstances where there is no inappropriate tax benefit received by a beneficiary.’

** For the trainspotters, the title of today's post is riffed from the Joni Mitchell song ‘Big Yellow Taxi'.

View here: