Excepted trust income and ‘bare’** trusts

A previous post has considered various aspects of the statement that ‘every will contains a testamentary trust’.

One example of where basic or 'bare' testamentary trusts exists includes where a gift is given to a beneficiary who does not have legal capacity (for example, because they are under the age of 18).

This was the factual matrix in the Tax Office private ruling mentioned in last week’s post, namely 1011602878465.

In particular –

1. The beneficiary had received gifts of money which were invested on their behalf by their parent.
2. The money had been sourced from several places, including money left to the beneficiary from a deceased estate.
3. The money was held in trust by the parent in a bank savings account named '[Parent's name] in trust for [child's name]'.
4. Under the terms of the relevant will, the child received a certain amount, which was to be paid to their parent or guardian to be held for the benefit of the child if the child was under 18.

It was held that the proportion of the interest income earned that would be 'excepted trust income' would be determined with reference to how much of the original amount invested into the bank account was sourced from the deceased estate, as compared to the amount gift from non-estate sources.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Cure song 'Bare’.

Listen here:

Lost trust** deeds and trust vesting

If a trust deed cannot be found, commercially it can often be the case that the most responsible approach is for the trustee to wind up the trust. Indeed, there may be disgruntled beneficiaries or third parties that essentially force a trustee to adopt this course.

Any vesting of a trust is likely to trigger a range of revenue consequences, particularly taxation and stamp duty.

These revenue consequences normally arise where a positive determination is made by the trustee to vest a trust, the trustee will usually resolve to make one or more beneficiaries absolutely entitled to the assets (or specific assets) of the trust.

While not intended to be an exhaustive list, the revenue related ramifications of a trust vesting can include:

1. capital gains tax being payable on the increase in the value of any assets being transferred since the date they were acquired;
2. income tax being payable on non-capital assets, such as plant and equipment and trading stock;
3. stamp duty being payable on the transfer of the assets, to the extent they comprise dutiable property in the relevant jurisdiction;
4. additional tax, stamp duty and commercial costs being incurred to subsequently transfer the assets out of the name of the recipient beneficiary (if they want the assets then re-routed to a trust environment);
5. asset protection exposure for the beneficiary receiving the assets in the event they subsequently commit an act of bankruptcy;
6. considering the impact of the rule against perpetuities (which effectively prevents a distribution to another trust if this causes the assets to remain within a trust environment for more than 80 years); and
7. where an individual receives the assets, the need to update their estate plan to reflect the additional assets owned in their personal name.

If the vesting of a trust is being anticipated by the parties, many of the consequences above can be adequately managed through appropriate planning.

** For the trainspotters, the title of today's post is riffed from the Cure song 'Trust’.

View here:

(Charlotte) Sometimes** complex wills fail for want of knowledge and approval

Previous posts have considered some of the key issues in relation to assessing testamentary capacity. 

Given the complexities with life estates mentioned over recent weeks, one aspect that often arises in this regard is the level of knowledge and approval the willmaker must have of their will. 

This is because the requirement that a willmaker knew and approved of the contents of their will is a separate and distinct requirement for validity to the question of the willmaker’s testamentary capacity. 

In this regard it is accepted that it is not necessary to establish that a willmaker was capable of understanding every clause of the will and its legal effect. 

Rather, it need only be shown that the willmaker understood that they were signing a will and the practical effect of its central clauses, including the gifts of property made. 

As with the assessment of capacity, the amount of evidence required to prove a willmaker understood their will depends on the factual matrix. 

In this context, the case of Hoff v Atherton [2005] WTLR 99 is relevant. 

This case confirmed that a court may require evidence that the effect of the document was explained, that the willmaker did know the extent of their property and comprehended and appreciated the claims on the estate that they should have considered. 

These factors are not considered simply because the court may have doubts as to the willmaker’s capacity to make a will. Rather the focus is on the separate issue of whether the willmaker knew and approved the contents of the will. 

This means that even a willmaker who is held to have full capacity, and was not subject to undue influence (see our previous post that explores this issue), can have probate of their will refused on the basis that the document does not express their true intentions. 

As usual, please contact me if you would like access to any of the content mentioned in this post. 

** for the trainspotters, ‘Charlotte Sometimes’ is a song by the Cure. View hear (sic):