What are superannuation proceeds trusts?

Recently, an adviser contacted me in relation to an estate planning exercise they were assisting with.

The lawyer advising the client recommended against establishing testamentary trusts until both the husband and wife had passed away.

The financial adviser was therefore exploring whether it would be possible to establish a 'superannuation proceeds trust' to effectively 'sidestep' the lawyer's recommendations.

For those not familiar with the superannuation proceeds trust structure, it is very similar to an estate proceeds trust (which was profiled in the post from 19 May 2010: http://blog.viewlegal.com.au/2010/05/testamentary-trusts-is-it-ever-too-late.html).

A summary of estate proceeds trusts is available on the View Legal website (www.viewlegal.com.au) via the core services section.

Until next week.

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Future of TDTs Post Richstar

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Future of TDTs Post Richstar’ at the following link - http://youtu.be/fUe8aX5DghI

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

The reality is that even despite decisions such as Richstar, testamentary trusts have always been a very strong vehicle from asset protection perspective.  

They're not a recent vehicle - they go right back into early English law, over hundreds of years.  While there has undoubtedly been an amount of white noise around them in recent times, the reality is that they are by far and away the most robust structure from an asset protection perspective. 

Importantly, they also ‘tick the box’ in terms of issues such as flexibility, tax planning and overall estate and succession planning objectives can almost always be achieved via a tailored testamentary trust.  

Ultimately, despite the Richstar decision, it is absolutely the case that testamentary trusts remain the choice structure for most estate planning exercises.

Until next week.

Important considerations when establishing a TDT

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Important considerations when establishing a TDT’ at the following link - http://youtu.be/D8HwIGVu8kk

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

Probably the two main components, although there's a myriad of things to be taken into account, but the two main components in light of Richstar would be firstly around control issues.

Particularly looking at things like who the trustee is of the trust, if there's going to be a corporate trustee, which is not unusual nowadays in relation to testamentary trusts, who will be the directors of the corporate trustee, who will be the shareholders of it, will there be  any restrictions or prohibitions on who can fulfil those roles. 

Similarly in that control context, exactly who will have ultimate control if there's going to be an appointor power?  So that would be the first main category and obviously there's a range of issues that sit around that.

The second category is exactly how regulated the trust is going to be in a mechanical sense in terms of the provisions of the will.  The particular things that advisers should be focusing on are issues like:

(a)         are there automatic disqualifications for particular roles;

(b)         if there are automatic disqualifications, do they apply permanently, or is it just during a period where a particular beneficiary or a particular appointor is in strife from creditors. 

Combining these two core components and there’s obviously a range of issues in between them, but generally as long as you can get those two broad silos right, that will set a good framework for a very strong structure. 

Until next week.

Age of entitlement

Following last week's post some questions were raised about at what age a person can be entitled to receive benefits under a will.

The issues in this regard are a little more complex, however broadly:

1. If a specific entitlement under a will passes to anyone under the age of 18, the trustee of the will effectively holds it for them on a bare trust until their 18th birthday. 
2. If an age is nominated in the will for a beneficiary to receive their entitlement, it will be held on trust until that age, unless the will is not drafted correctly (there are some complex issues that can apply in this regard). If the will is not drafted correctly, then regardless of the age nominated, the beneficiary can get access to the gift on their 18th birthday. 
3. Generally, none of the above rules are applicable where the asset passes to a testamentary trust – in this instance, the assets normally remain indefinitely within the trust structure, regardless of the age of the beneficiaries. 

Until next week.

Scope of the Richstar decision

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Scope of the Richstar decision’ at the following link -  http://youtu.be/N2VpKrws93c

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

It’s fair to say Richstar is seen as probably the high watermark in relation to how the assets of a trust may be exposed in the context of some sort of bankruptcy litigation. Interestingly, it has remained almost as an outlier decision.

There really haven't been any decisions that have supported the landing the court reached in relation to Richstar. On top of that, the cases like Smith which have come down since Richstar, effectively completely ignore Richstar and go to the extent of saying it doesn't actually represent good law.

Ultimately, pragmatically and practically what the position seems to be is as long as a trust is structured appropriately it will provide a very good level of asset protection from creditors and should be seen as probably the choice structure in an estate planning exercise under a will - in other words, the use of a testamentary discretionary trust - in order to provide an adequate level of protection.

Until next week.

Segregating assets via multiple TDTs

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Segregating assets via multiple TDTs’ at the following link - http://youtu.be/9_dgi85kC0s

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

TDTs or testamentary discretionary trusts have historically been considered almost immune from anything in relation to wider asset protection issues, simply because they're set up under the will of the will maker.

What we've seen over time however is that what has been a fairly traditional approach in terms of having very passive assets sit inside the trust has gradually expanded. It’s not unusual to have business run through a testamentary trust or a partnership interest through a testamentary trust. In any of those scenarios, all of the normal principles that apply to asset protection and limited liability equally apply to testamentary discretionary trusts.

As there's no extra protection provided by the testamentary trust, basic structuring issues such as utilising a corporate trustee to provide limited liability for the structure, or more importantly, ideally, using separate special purpose vehicles to undertake each uniquely risky business activity is strongly preferred.

Until next week.

What are the exceptions to the assets of a testamentary trust being protected?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What are the exceptions to the assets of a testamentary trust being protected?’ at the following link - http://youtu.be/BzC3jFYyWp4



As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

The main exception that comes up in a practical sense is primarily for tax reasons where distributions have gone down to an at risk beneficiary out of the trust and then those amounts remain unpaid, so they become an unpaid present entitlement or they become a credit loan on the balance sheet of that trust.

In that scenario, obviously, if the at risk beneficiary gets into strife and a trustee in bankruptcy is appointed, even though the asset is ultimately inside the trust, that trust has the obligation to repay the debt and the asset effectively comes out sideways in that scenario.

There are however a myriad of other reasons that trusts can be at risk. Some of the obvious ones include where the at risk beneficiary fulfils a really important role in the trust, whether that be an individual trustee, a director of a corporate trustee, a shareholder of a corporate trustee, or perhaps most relevantly, where the at risk beneficiary fulfils the role of an appointor.

Until next week.

Taxation consequences of testamentary trust distributions - Part II

Again for those that do not otherwise have easy access to the Weekly Tax Bulletin, Part II of the article by fellow View Legal Director Patrick Ellwood and I is extracted below.

Part I of this article (at 2014 WTB 19 [658]) considered a number of specific aspects of the transfer of assets under a deceased estate testamentary trust. Part II of the article now considers:

• distributions from testamentary trusts to beneficiaries;
• the proposed changes to CGT event K3; and
• the proposed changes where an intended beneficiary dies.

Distributions from testamentary trusts

In 2003, the ATO released PS LA 2003/12, which states that its purpose is to inform ATO staff that the Commissioner will not depart from the long-standing administrative practice of treating the trustee of a testamentary trust in the same way as a legal personal representative (LPR) is treated for the purposes of Div 128 of the ITAA 1997.

In the 2011-12 and 2012-13 Federal Budgets, it was proposed that the current ATO practice set out in PS LA 2003/12 of allowing a testamentary trust to distribute an asset of a deceased person without a capital gains tax (CGT) taxing point occurring would be codified.

While draft legislation to effect the change was prepared, the Federal Government announced that it was reviewing the progress of a large number of unenacted legislative announcements and ultimately confirmed on 14 December 2013 that the amendments would not be implemented - see 2013 WTB 53 [2270] and also 2014 WTB 12 [399].

As set out at 2014 WTB 16 [561], the ATO recently republished PS LA 2003/12 confirming that it intends to continue to consider itself bound by it. Despite the ATO apparently acknowledging that the Government will not proceed with any legislative changes, some amount of confusion has been caused by the ATO stating in updates on its website that it will "accept tax returns as lodged during the period up until the proposed law change is passed by Parliament". Those comments are contained in the ATO update entitled "Refinements to the income tax law in relation to deceased estates" (dated 22 April 2014). It is assumed these comments are simply an oversight by the ATO and that PS LA 2003/12 (as amended) will continue to be applied indefinitely into the future.

The position therefore appears to remain that there is exemption roll-over from CGT covering the "transfer" of assets from the LPR to the trustee of the testamentary trust in the first instance and the subsequent transfer by the trustee to an eventual beneficiary of the testamentary trust. The subsequent transfer may either involve a capital distribution being made by the trustee of the trust to a beneficiary during the lifetime of the trust, or a payment of capital upon vesting of the trust.

The result of PS LA 2003/12 is that, on the subsequent disposal of a CGT asset from a testamentary trust trustee to a beneficiary of the testamentary trust:

• any capital gain or loss that the testamentary trust trustee makes is disregarded under s 128-15(3); and
• the beneficiary will be taken to have acquired the CGT assets of the deceased at the date of the deceased's death (rather than on the date they were distributed by the LPR) and the first element of the cost base and reduced cost base for the beneficiary will be:
• for pre-CGT assets in the hands of the deceased - the market value of the asset on the day the deceased died; and
• for post-CGT assets in the hands of the deceased - the deceased's cost base (or reduced cost base) at the date of their death.

Ultimately under PS LA 2003/12, Div 128 (in particular ss 128(2), (3) and (4)) effectively applies twice:

• initially, when the LPR is the "LPR" for the purposes of Div 128 and the testamentary trust trustee is the "beneficiary"; and
• subsequently, when the testamentary trust trustee is treated as an "LPR" for the purposes of Div 128 and the beneficiaries of the testamentary trust are treated as the "beneficiaries".

CGT event K3

The ATO has indicated that the position in PS LA 2003/12 is subject to CGT event K3, which covers assets passing to tax-advantaged entities.

CGT event K3 operates to ensure that, where assets pass to concessionally taxed entities from a deceased estate, a capital gain or loss is recognised in the deceased's final tax return. This prevents assets with embedded capital gains from avoiding capital gains when they are later disposed of by the concessionally taxed entity. CGT event K3 has, in the past, been avoided by ensuring an asset does not pass to a concessionally taxed entity until after the deceased's standard amendment period (generally 4 years after the assessment) has expired.

As part of the 2011-12 Budget measures, it was announced that amendments would be made to ensure that where CGT event K3 happened outside of the deceased's standard amendment period, a CGT liability still arose in the deceased's tax return. It was proposed this could be achieved by excluding CGT event K3 from the standard amendment period.

In particular, the CGT event would have been deemed to happen to the relevant entity that passed the asset to the concessionally taxed entity (rather than with the beneficiary), avoiding the need to amend the deceased's tax return. This change would have allowed the entity to which CGT event K3 applied to be able to utilise its realised capital losses against CGT event K3, instead of the deceased utilising their capital losses against their capital gain from CGT event K3.

The change would have been consistent with how Div 128 operates under PS LA 2003/12 where an LPR or testamentary trust trustee sells an asset to a third party, rather than passing the asset to the intended beneficiary of the estate.

However, as with other proposed changes mentioned below, the announced changes to CGT event K3 were abandoned in late 2013.

Where an intended beneficiary dies before administration is completed

The Federal Government released a proposal paper "Minor amendments to the capital gains tax law" in June 2012 which specifically addressed the circumstance where an intended beneficiary dies before administration of an estate is completed. Generally, in that situation, s 128-15 provides a CGT roll-over provided that the asset passes from the first deceased's LPR to the beneficiary's LPR.

However, no CGT roll-over exists where the asset passes (ultimately) from the first deceased's LPR via the second deceased's LPR to the trustee of a testamentary trust or a beneficiary of the intended beneficiary's (ie the second deceased) estate because the asset was not one which the intended beneficiary owned when they died.

The former Labor Federal Government proposed to introduce measures to allow the intended beneficiary's LPR to access the roll-over where the intended beneficiary died before an asset that the first deceased owned passed to them, regardless of whether it passed first to a testamentary trust trustee. Again, however, the Coalition Government confirmed the amendments would not be implemented.

Arguably, PS LA 2003/12 can be relied on to provide relief in this type of situation.

Image credit: Alan Cleaver cc

Taxation consequences of testamentary trust distributions - Part I

There has been a refocus on what is likely to be the approach of the ATO in this area.

For those that do not otherwise have access to the Weekly Tax Bulletin, the article from last week by fellow View Legal Director Patrick Ellwood and I is extracted below.

In December 2013, the Federal Government announced its decision to abandon a number of proposed legislative changes in relation to various aspects of the taxation of testamentary trusts - see 2013 WTB 53 [2270] and also 2014 WTB 12 [399]. As a result, there has been a refocus on what is likely to be the approach of the ATO in this area.

Part I of this 2-part article considers the taxation aspects of:

• the transfer of assets under a deceased estate;
• distributions from a will maker to a legal personal representative (LPR);
• distributions from a LPR to a testamentary trust.

Part II of this article will focus on distributions from testamentary trusts to beneficiaries and the abandonment of the previously announced legislative changes.

Transfer of assets

On the death of a will maker, each asset of the estate will potentially be transferred 3 times:

• from the will maker to the LPR;
• from the LPR to the beneficiary of the estate, which may be the trustee of a testamentary trust; and
• where the recipient was the trustee of a testamentary trust, from that trustee to a beneficiary either as a capital distribution during the lifetime of the trust or as a distribution of corpus upon vesting.

The CGT consequences of each of the abovementioned transfers must be separately considered.

Distributions from will maker to LPR

The first roll-over to examine is the initial transfer of a deceased's assets from the deceased person to their LPR for distribution under the terms of the deceased's will.

As a starting point, the general position is that, when a taxpayer dies, any capital gain or loss from any event relating to a CGT asset owned by the deceased is disregarded under s 128-10 of the ITAA 1997. This means that the distribution from the deceased to their LPR does not result in a CGT liability for the deceased.

As to the consequences for the LPR, the CGT assets are taken, under s 128-15 to have been acquired by the LPR on the date the deceased died. The cost base of each CGT asset (other than for a property which was a main residence for the deceased immediately before they died) for the LPR is modified under s 128-15(4) so that:

• for pre-CGT assets in the hands of the deceased - the first element of the LPR's cost base (and reduced cost base) is the market value of the asset on the day the deceased died (meaning that pre-CGT assets in the hands of the deceased become post-CGT assets in the hands of the LPR); and
• for post-CGT assets in the hands of the deceased - the first element of the LPR's cost base (and reduced cost base) is the deceased's cost base (or reduced cost base) at the date of their death (i.e. the deceased effectively passes their cost base and reduced cost base to the LPR).

Distributions from LPR to testamentary trust

From a CGT perspective, a testamentary trust is treated much the same as other trusts. However, it should be noted that CGT event E1 does not apply to the creation of a testamentary trust since that event only applies to the creation of a trust "by declaration or settlement".

In the testamentary trust scenario, there is no such declaration of trust and there is no initial settlement sum.

The CGT rules which apply to the distribution from the deceased to the LPR apply in the same manner to subsequent distributions from the LPR to a "beneficiary" of the estate.

It would appear that "beneficiary" for the purposes of the ITAA 1997 includes the trustee of a testamentary trust (however, as will be explained in Part II of this article, for the purpose of Div 128, the trustee of a testamentary trust is also treated the same as an LPR by the ATO), meaning that distributions from an LPR to the trustee of a testamentary trust are treated in the same manner as distributions from an LPR to an individual beneficiary.

A CGT asset is taken to have passed to a beneficiary of a deceased's estate if the beneficiary (or in this case, the trustee of the testamentary trust) becomes the owner of the asset whether under the terms of:

• the deceased's will;
• under the intestacy laws; or
• under a deed of arrangement.

Section 128-15(3) provides that on a subsequent distribution from the LPR to a beneficiary (including the trustee of a testamentary trust), any capital gain or loss that the LPR makes is disregarded.

Again, the trustee of the testamentary trust is taken to have acquired the CGT assets of the deceased at the date of the deceased's death (rather than on the date they were distributed by the LPR) and the first element of the cost base (and reduced cost base) for the testamentary trust trustee will be:

• for pre-CGT assets in the hands of the deceased - the market value of the asset on the day the deceased died; and
• for post-CGT assets in the hands of the deceased - the deceased's costs base (or reduced cost base) at the date of their death.

The testamentary trust trustee is also able include in its cost base any expenditure the LPR has incurred, up to the time of the disposal by the LPR, that the LPR would have been entitled to include in its cost base had it retained the asset.

Until next week.

Image credit: Barbara Agnew cc

EPAs and conflicts of interest

With the aging population, conflicts of interest arising particularly in relation to the use of an enduring power of attorney (EPA) are becoming far more prevalent.

Previous posts have looked at cases like Stanford. Recently we had a client situation that underlined how critical it is to include a conflict of interest provision in an EPA. This style of provision is not standard in any government form and indeed many lawyers do not choose to include such a provision.

The situation the client faced was as follows:

1. The main asset in the estate was a family home which was owned as joint tenants. 
2. The husband lacked capacity due to advanced dementia, although was otherwise in good health. 
3. Our client (the wife) wanted to include testamentary discretionary trusts under her will to provide for the children of the relationship. 
4. The husband’s will was a very basic document and did not allow for testamentary discretionary trusts. 
5. To ensure that half the value of the house would pass into an appropriate structure if the wife predeceased the husband she was wanting to rely on her appointment as the husband’s EPA to sever the joint tenancy (for a summary of the distinction between owning assets as joint tenants and tenants in common see http://mwbmcr.blogspot.com/2010/02/what-exactly-does-jointly-mean.html). 
6. Due to an appropriately crafted conflict of interest clause in the EPA, the wife was able to quickly and easily implement the severance and avoid some of the more complex solutions that might also have been available such as the unilateral severance of the tenancy or applying for a court ordered will (the court ordered will process is featured in previous posts: http://mwbmcr.blogspot.com/2013/08/court-drafted-wills.html and http://mwbmcr.blogspot.com.ar/2013/09/using-court-drafted-wills-to-achieve.html). 

Until next week.

Image credit: Schnaars cc

Using court drafted wills to achieve asset protection and tax planning

Photo Credit: Joe Gratz via Compfight cc

Last week's post focused on the recent case of Re Matsis. This recent decision was one of the first situations where a court permitted a new will to be prepared for someone who had lost capacity where the primary reason for the application was not that the person had no will. Instead, the catalyst was that the beneficiaries were wanting to ensure the appropriate level of commercial asset protection and tax planning would be available.

The decision is particularly important because there are other cases where, in the past, similar requests have been denied.

Arguably, the important factors here included:

1. evidence was able to be shown that the will that was in place before the will maker lost capacity was largely seen by him as an 'interim' document; 
2. the only person who could have brought a challenge against the estate was the will maker's daughter, who indicated in the proceedings that she was independently wealthy and had no intention of challenging the estate; 
3. the ultimate beneficiaries of the estate (and the people bringing the application) were the will maker's grandsons. While each of them potentially had asset protection risks, none of them were aware of any potential litigation; 
4. the change to the existing will did not alter any of the provisions in relation to, for example, executorship or any specific gifts; 
5. while the grandsons lost direct entitlement by the inclusion of the testamentary trusts, they were still ultimately the likely potential beneficiaries via the trust structures; and 
6. the court accepted evidence that the will maker may well have himself implemented testamentary trust provisions, had he not lost capacity. 

Until next week.

Court drafted wills

One of the more fundamental developments in relation to estate planning in recent years has been the introduction in most Australian states of government legislation empowering courts to make wills on behalf of people who otherwise lack the capacity.

There have been an increasing number of cases to go through the courts in this area. The recent Queensland case of Re Matsis; Charalambous v Charalambous & Others [2012] QSC 439 is particularly interesting as it appears to be the first case that allowed a court-ordered will where the primary objective was not because the relevant incapacitated person had no will at all. Rather the situation was that the pre-existing will did not achieve the appropriate asset protection and tax planning objectives of the ultimate beneficiaries.

For those interested in reading a full copy of the decision, a link to the judgment is as follows: http://www.austlii.edu.au/au/cases/qld/QSC/2012/349.html.

The case involved a businessman who had accumulated some millions of dollars of wealth and who had signed an 'interim' will, which did not incorporate any testamentary trusts, sometime before losing capacity to dementia.

On the application of the ultimate beneficiaries, the court allowed them to introduce comprehensive testamentary trust provisions into the will as if they were inserted before the will maker's death.

Next week's post will focus on some of the key aspects that the court took into account before allowing the variation to the will.

Until next week.

Rights to Occupy

Today's post looks at the creation of a life interest in a residential property under a will.

Traditionally, life estates were created where a will maker wanted to allow a particular beneficiary the right to reside in a property without gifting them it directly. 

For a myriad of reasons, the creation of a life interest is rarely appropriate as part of a modern day estate plan, and we generally see the use of either a specially crafted testamentary trust, or alternatively, a right to occupy as the appropriate approaches to use. 

Some of the reasons that life estates are no longer of particular use include:

1. A traditional life estate is very inflexible, particularly if the life tenant no longer wishes to reside in the property. 
2. Some of the reasons that the original property may no longer be appropriate include its size, geographic location or because of the level of care required for the individual (for example, they need to move to a nursing home). 
3. Often, will makers look to craft the life estate so that it ends on the life tenant entering into a new spousal relationship – the courts have been clear that such a restriction is likely to be struck down as void. 
4. There are a number of inflexibilities in relation to the way in which the life tenant and remainderman can interrelate – ultimately, it is often very difficult to end the arrangements other than on the death of the life tenant. 
5. There are significant adverse revenue consequences, both from a tax and stamp duty perspective, that can arise in relation to life estates. These difficulties are particularly detrimental if there is a desire to end the life estate before the death of the life tenant. 

Until next week.

Single v multiple testamentary trusts: The ‘hybrid’ approach

Recent posts have looked at various aspects of the debate in an estate planning context of whether a single or multiple testamentary discretionary trust (TDT) will provide the best outcome.

As highlighted in those posts, there are a myriad of issues that should be taken into account and often the approach that best suits the client may change over time.

One mechanism that we have seen used with increasing regularity is a ‘hybrid’ approach.  Under this model, elements of both the single and multiple testamentary trust solutions are combined.

For example:

1              a set percentage (or certain assets) are distributed to a TDT which includes all lineal descendents as potential beneficiaries (i.e. the ‘head’ trust);

2              the control of this ‘head’ trust is jointly shared amongst various family members and any nominated independent trustees;

3              a separate TDT is also established for each child and their respective lineal descendents;

4              a separate percentage share of the estate, or discreet assets, are then gifted to each of these ‘sub’ TDTs; and

5              normally each child would control (perhaps jointly with a co-trustee) ‘their’ TDT.  Each child would also have the ability to independently regulate succession of control for their trust.

As in any estate planning exercise the appropriateness of the hybrid approach will depend on a range of issues including the exact objectives of the client, the overall family dynamics and the nature and value of the wealth involved.

Until next week.

Single v multiple testamentary trusts: The debate continues

Last week’s post set out a number of reasons as to why a single testamentary discretionary trust (TDT) might be the preferred structure, even if there are multiple family members to benefit under an estate plan.

As noted there are a number of factors that need to be taken into account in any particular estate planning exercise and there are a wide range of the factors that might be relevant in deciding to implement multiple TDTs.

Many of these factors have a practical focus and can include:

1              the different geographical locations of the children - particularly if one or more children live overseas;

2              poor relationships between siblings (or their respective spouses) meaning that jointly controlling wealth is likely to further fragment family dynamics;

3              the risk profiles of each child’s investment outlook;

4              the underlying nature of the wealth – for example, if particular assets are earmarked for the sole control of a particular beneficiary;

5              differences in the ‘life cycle’ of each beneficiary – for example if one child themselves has young (or no) children whereas another child has adult children, their investment objectives can look quite different;

6              the desire to have different control mechanisms in relation to different children – for example one child might be the sole controller of their TDT whereas another child may have one or more co-trustees, or indeed, not be a trustee at all; and

7              there can be a myriad of difficulties that arise if a single TDT is utilised and it is still running in, say, two generations time both in terms of overall management of the structure and how income and capital is ultimately allocated.

In the next post we will look at one further variation on this debate, the so called ‘hybrid’ approach.

Until next week.

Single v multiple testamentary trusts: The debate

One issue that comes up regularly in estate planning exercises where there is more than one family unit ultimately to benefit, is whether a single or multiple testamentary discretionary trusts (TDTs) should be implemented.

For example, if there are three adult children, each to share an estate, should those three children jointly control a single TDT or should each child (perhaps with a co-trustee) control a separate TDT, with each TDT receiving one-third of the estate.

As with many aspects of estate planning, there is no ‘correct’ approach.  This said, some of the factors that would tend to support using a single TDT include:

1              if some (or all) of the children are under the age of 18 – an estate planning exercise should always be undertaken on the assumption that the willmaker dies shortly after signing the document.  Therefore the primary focus should be on the needs of the surviving spouse.  In these circumstances, it is generally not appropriate for the wealth to be held across multiple TDTs where the surviving spouse will likely be in control for many years;

2              if asset protection (for example guarding against a relationship breakdown of any of the children) is critical, then generally a single TDT will be the more robust approach;

3              if the vision of the will maker is to have the next generation (i.e. their children) effectively act as ‘custodian’ for future generations, then this is normally more easily achieved via a single trust; and

4              if the underlying nature of the assets would make a ‘split’ ownership structure unduly complicated – for example if there is, say, one significant asset (such a property or business).

The next post will focus on some of the reasons that a multiple TDT strategy might be more appropriate.

Until next week.

What are some of the steps taken in relation to regulating control of testamentary trusts

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What are some of the steps taken in relation to regulating control of testamentary trusts?’ at the following link - http://youtu.be/A104L8JfGGw




As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

The reality I think for many people in this area at the moment that estate planning as a whole, and particularly the use of more bespoke forms of testamentary trusts, is the ‘new black’. 

What that has meant I think for a lot of advisers in this area, particularly for those with legally trained advisers is that many of the concepts that you see in wider corporate law or corporations law are now actually being filtered back into traditional estate planning.

What we're finding, particularly where people are wanting to use trusts that are going to last at least 2 generations, possibly even 3 or 4, is that the regulatory regime, if you like, sitting around the control of those structures is becoming far more sophisticated.

Probably the biggest thing we're seeing in that area is the use of specifically set up trustee companies. Not in terms of the government setup structure, but in terms of the actual client setting up a corporate structure and being very particular about the way the constitution of that company is crafted, the way shareholders can be nominated, the way directors are appointed and the way voting takes place within that structure all overseeing the way in which the actual trust is going to be run moving forward.

Until next week.

What are the stamp duty consequences of assets passing via testamentary trusts

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What are the stamp duty consequences of assets passing via testamentary trusts?’ If you would like a link to the video please let me know.

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

One of the great difficulties in this area, and I think it's an often used phrase, is that in many respects, a lot of these issues, sort of you take one step forward and 2 or 3 steps backwards.

As much as we've touched on already, the great step forward in terms of legislative certainty around the way in which the Tax Office is going to interpret Division 128 from a capital gains tax perspective, conversely what we're seeing from a stamp duty perspective is almost the exact opposite.

So obviously, we still have a situation across Australia where every single state has different stamp duty tests and different stamp duty rules in relation to how they apply distributions under a deceased estate.

It can be said that in every jurisdiction there is certainly an alignment between Division 128 under the Tax Act for the transfer of assets from the will maker to the legal personal representative and from the legal personal representative down into a trust structure.

From there, unfortunately, it really does start to unravel quite significantly, because even in the states that historically allowed assets to be distributed out of an initial trust into a sub trust or out of an initial trust directly to an individual beneficiary, those states are starting to wind back from that position and we've got a situation for many clients where if they're going into the structure, the conservative and prudent advice will probably be that they should expect to pay stamp duty when ultimately taking assets out of the initial trust.

Now I guess that line of reasoning or line of argument needs to be counterbalanced against, and the discussion about whether in fact there will be dutiable property inside the trust; and to the extent that the assets are likely to centre around cash or managed funds or shares, then it may well that for many clients the fact that there's a potential stamp duty risk down the track is in fact irrelevant.

For any adviser working in this space, the ability to give complete signoff from a tax perspective is very much counterbalanced against the fact that from a stamp duty perspective there has to be seen to be a real risk moving forward that there will be double stamp duty potentially.

Until next week.

What are the tax consequences of assets passing via a testamentary trust

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘what are the tax consequences of assets passing via a testamentary trust ?’ at the following link - http://youtu.be/pqngu0EddtQ

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below -

The reality has been that ever since the Practice Statement was released in around 2003, there has been a really implicit acceptance across the industry, and one would hope from the Tax Office as well, that the interpretation of Division 128 that allowed the transfer of assets, not only from a legal personal representative down into a testamentary trust, but then from that testamentary trust to another testamentary trust under some form of cascading arrangement, would be free from capital gains tax.

More importantly, any ultimate transfer out of the testamentary trust, whether it be the initial trust or a subsequent trust, would also be free of capital gains tax.

What that Practice Statement did was effectively give that approval from the Tax Office that that approach, that really had been the approach across the industry for many, many years, was not going to be challenged by the Tax Office.

What we've seen in very recent times, particularly with the 2011 federal budget, is that even though that approval seemed to be there from the Tax Office, the level of uncertainty that was created when you read that back with Division 128, meant that legislative reform was required.

We're seeing that coming through the system now with the announcement in the 2011 federal budget, which effectively looks to replicate the position under the Practice Statement from 2003.

Until next week.

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 - http://youtu.be/YaMouN6Pox0

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.