Why every will contains a testamentary trust (Not calling anyone a liar**)

While the popularity of comprehensive testamentary trusts has continued to grow significantly in recent years, strictly every valid will does contain a form of testamentary trust.

While the popular usage of the term 'testamentary trust' refers to a comprehensive discretionary trust embedded into a will instrument, testamentary trusts can refer to any arrangement set out under a will where the intended beneficiaries are not absolutely and immediately presently entitled.

The structure lasts only for the length of administration of the estate (ie normally only a few months).

They are not testamentary trusts as normally understood and do not offer any ongoing tax, asset protection or flexibility advantages.

The phrase for the clause establishing this form of ‘trust’ in a will is often along the lines of:

‘As to 50% of my Net Estate, UPON TRUST for my child once they attain the age of 25 years absolutely’

One (perhaps anecdotal) way to determine if a will has a comprehensive testamentary discretionary trust included is to apply ‘the weight test’.

That is, a comprehensive testamentary discretionary trust will usually is around 30 pages in length.

A ‘bare’ testamentary trust will is rarely more than 10 pages, and can often be as short as 2 pages.

Some examples of where basic or 'bare' testamentary trusts exist include:

1. where the beneficiary receives a direct gift that is subject to them attaining a certain age (for example, the clause set out above);
2. where a gift is given to a beneficiary who does not have legal capacity (for example, because they are under the age of 18, or are over the age of 18 and lack mental capacity); and
3. where a specific gift is given to a beneficiary, however the administration process of the estate has not been completed.

In relation to the first two categories, the Tax Office will generally allow the ultimate beneficiary to enjoy access to the excepted trust income provisions.

In relation to the last category however, the Tax Office generally only allows a maximum of 3 years whereby the excepted trust income provisions apply, and practically, we are aware of situations where they in fact only allow a maximum of 12 months.

The Taxation Ruling IT 2622 explains in more detail the Tax Office’s approach.

The case of Walker v Walker [2022] NSWSC 1104 similarly explores many of the key principles in this area - and indeed appears to support a conclusion that the administration process of an estate will be completed, at least for the purposes of present entitlement for tax, at a point in time even earlier than what the Tax Office has historically suggested in the IT.

That is a beneficiary may be held to have a vested and indefeasible interest to the income (and be specifically entitled) far earlier than might otherwise be assumed. Furthermore, executors may have a duty to ensure tax imposts are legitimately minimised by protectively making interim distributions to beneficiaries.

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 Florence and the Machine song 'I’m not calling you a liar’.

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Court's unilaterally removing trustees - the Judge will carry the Weight**

Posts over the last 2 weeks have explored a number of aspects of the super death benefit case of Marsella.

One other key aspect of the case also explored what issues a court will consider before a trustee is removed against their will.

Another View post considers a number of the key issues in this regard, as explained in the decision about one aspect of the Lang Hancock and Gina Rinehart saga (namely Hancock v Rinehart [2015] NSWSC 646).

The Marsella case quotes the decision in Elovalis v Elovalis [2008] WASCA 141 and summarises the approach the courts must take in this area as follows:

1. In determining whether a trustee should be removed the chief consideration is the welfare of the beneficiaries.
2. The Court will have regard to the security of the trust property, the efficient and satisfactory execution of the trust and the faithful and sound exercise of powers conferred upon the trustee.
3. A breach of trust will not necessarily lead to the removal of a trustee, nor will the existence of a conflict between duty and interest.
4. At times, however, such factors may be sufficient to justify the trustee’s removal.
5. Ultimately, whether the Court exercises its discretion turns upon the circumstances of each case - or, as quoted from the case of Miller v Cameron (1936) 54 CLR 572:

'a judgment (to remove a trustee against their will) must be largely discretionary.

A trustee is not to be removed unless circumstances exist which afford ground upon which the jurisdiction may be exercised.

But in a case where enough appears to authorise the Court to act, the delicate question whether it should act and proceed to remove the trustee is one upon which the decision of a primary Judge is entitled to especial weight.'

Thus, in Owies and Owies v JJE Nominees Pty Ltd (ACN 004 856 366) (in its capacity as trustee for the Owies Family Trust) [2022] VSCA 142 (a case also featured in other View posts) the trustee was removed due to the court concluding that over a number of years the trustee had failed to:

1. act impartially;
2. give real and genuine consideration to the interests of two of the three primary beneficiaries;
3. appreciate that the relations between the beneficiaries and the trustee were irreconcilably damaged.

Therefore, it was not in the best interests of the beneficiaries for the trustee to continue in office.

Similarly, in JPD as Guardian v DMS as Trustee [2022] QSC 181 a trustee of testamentary trusts set up for infant children, who was a friend of the deceased mother, was removed by the court at the request of the father (who was divorced from the mother at the time of her death).

The reasons included the trustee:

1. demonstrating a pattern of holding a very low opinion of the father (who had no wealth and was not in paid employment) and giving no genuine weight to the importance of his position in the children’s lives as their sole guardian and surviving parent;
2. not making any attempt to consult with the father adequately;
3. unilaterally reducing income distributions to the children by around 75%;
4. purporting to evict the father and the children from a home owned by the trust, and requiring a move to a new property owned by the trust;
5. rejecting a request (which the court believed was reasonable) by the father to move the family to Brisbane;
6. regularly and inappropriately intervening in parenting aspects of the children.

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 Aretha Franklin song 'The Weight'.

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Estate planning and the 2017 super reforms – the 11 things you must be aware of

The 2017 superannuation reforms are widely acknowledged as being the most fundamental changes to the superannuation landscape in over a decade.

While the reforms will have a significant impact across a range of areas, the consequences from an estate planning perspective are at risk of being overlooked.

In no particular order, the fundamental issues that must now be considered when managing superannuation entitlements from an estate planning perspective are as follows:

1. Where an individual has a reversionary pension for an amount currently in excess of the $1.6 million balance transfer cap (which will be indexed for CPI), steps will need to be taken to manage how the amount which gets rolled back to their accumulation account is dealt with upon their death – for instance, via a binding death benefit nomination.
2. While the exact factual matrix will always be critical, as a general comment, entitlements above the $1.6 million limit should be paid to tax death benefits dependants, ideally via a superannuation proceeds trust as part of a testamentary trust under a will (previous posts have explored various aspects of superannuation proceeds trusts, see Superannuation proceeds trusts, View Legal and superannuation proceeds trusts and Superannuation proceeds trusts: Tricks and traps).
3. The utility of a superannuation proceeds trust is significantly undermined where there are no death benefit dependants for tax purposes. Where a person has superannuation entitlements and no tax dependants, the consequences of the ‘fast death tax’ remain critical to consider. The so-called ‘fast death tax’ arises where funds that could otherwise be withdrawn tax free by the member during their lifetime remain in the fund at the date of death of the member and are then subject to tax on the distribution from the fund. 
4. The ability to make anti-detriment payments ends on 30 June 2017. Anti-detriment payments were beneficial in many situations, although had limited applications for self-managed superannuation funds. 
5. Any estate planning strategy will continue to be ultimately dependent on the trust deed for the relevant fund and a detailed review of the deed should be undertaken before any succession strategies are implemented. 
6. The conservative approach is that all trust deeds should be reviewed in light of the 2017 changes, with particular focus on the client’s estate planning objectives. Our experience to date is that in most cases, a deed update will be appropriate. 
7. Regardless of whether a trust deed is updated, reviewing related estate planning documents to ensure that they align with the client’s objectives is critical. In particular, all death benefit nominations and reversionary pensions must be reviewed (for instance, in the context of the $1.6 million transfer balance cap mentioned above). To the extent that there are binding nominations in place, the structure of those nominations may need to be updated (again, previous posts have explored a number of relevant aspects in that regard, see Superannuation and binding death benefit nominations (BDBN), Death benefit nominations – read the deed and Double entrenching binding nominations).
8. Similarly, the ability to make decisions, including potentially renewing or changing nominations in the event of a member’s incapacity, must be addressed by a comprehensive, superannuation compliant, enduring power of attorney. An appropriately crafted document in this regard will also provide a pathway to potentially avoid ‘fast death tax’ being triggered. 
9. The utility of reversionary pensions will be significantly undermined if the consequence of the reversionary pension is that the recipient exceeds their transfer balance cap. 
10. That said, in the right factual scenario, a child pension may provide planning opportunities as a child is entitled to access each of their parents transfer balance cap – in other words, if the two parents pass away, the children of the relationship can get access to up to $3.2 million. Unless a child has a permanent and significant disability however, any balance in a pension account on the child reaching the age of 25 must be commuted and paid to them as a lump sum. From an asset protection perspective, this has significant adverse consequences that need to be considered. 
11. A carefully crafted testamentary trust will, which can provide tax benefits that are broadly similar to those that could be obtained by a child allocated pension, may be preferable to ensure that access to capital only takes place at appropriate junctures and not automatically at the age of 25. 

Next week’s post will consider some of the specific post-death consequences of the new rules.

The above post is based on the article we recently had published in the Weekly Tax Bulletin. Finally, many of the themes in this post were featured in our recent Estate Planning Roadshow.

Download the brochure to purchase a full recording of the event here - https://viewlegal.com.au/product/recorded-webinar-package/

Image courtesy of Shutterstock

Post death testamentary trusts

Previous posts have touched on various forms of testamentary discretionary trusts, including 'post death' testamentary discretionary trusts http://blog.viewlegal.com.au/2010/05/testamentary-trusts-is-it-ever-too-late.html.

In very broad terms, these trusts are created so as to provide a pathway to access the excepted trust income rules under the Tax Act. In particular, they allow income to be distributed at adult rates to children under the age of 18.

While there are a number of rules that need to be complied with before setting up a post death testamentary trust, it is worth remembering that the structure is in fact available in a variety of circumstances, including:

1. Where the deceased dies with assets in their own name and a basic will (i.e. not incorporating a testamentary trust);
2. Where the deceased dies with assets in their name and has no will (i.e. they are intestate);
3. Where the deceased dies with superannuation entitlements (including insurance); or
4. Where the deceased dies with insurance entitlements.

Importantly, this type of trust is also available where the parties to a marriage separate and there are child support obligations that need to be satisfied.

View’s 90 minute webinar exploring the key issues in relation to post death trusts is available here - https://viewlegal.com.au/product/recorded-webinar-package/

Extracts of the webinar are also available via our podcast channel, see - https://viewlegal.com.au/view-podcasts/

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Testamentary trusts and excepted trust income

For those that do not otherwise have access to the Weekly Tax Bulletin, a further recent article by fellow View Legal Director Patrick Ellwood and me is extracted below.

The recent Tax Office Private Binding Ruling Authorisation number 1012846046513 (Ruling), reported in this Bulletin, considers a number of key issues relating to the distribution of assets via testamentary trusts under deceased estates.

The Ruling largely follows the well-publicised Practice Statement Law Administration PS LA 2003/12 (PSLA 2003/12), which was republished in April 2014 (reported at 2014 WTB 16 [561]), and then updated in August 2015 to the new LAPS format and style.

The Ruling is a timely reminder of the need to ensure care is taken with any intended distributions from a testamentary trust.

Overview of questions answered

The Ruling confirms the following, in each instance largely applying PSLA 2003/12:

• Div 128 of the ITAA 1997 applies to disregard any capital gains tax on the distribution of assets from a testamentary trust directly to individual beneficiaries of a testamentary trust;
• a valid variation of a testamentary trust to allow distributions to inter vivos trusts, that were not originally potential beneficiaries of the testamentary trust, would not trigger a CGT event; and
• Div 128 of the ITAA 1997 also applies to disregard any CGT on the distribution of assets from a testamentary trust directly to inter vivos beneficiaries of a testamentary trust.

Aside from also making comments about the non-application of the anti-avoidance provisions under Pt IVA of the ITAA 1936, the Ruling specifically considers whether s 102AG(2) of the ITAA 1936 would apply to treat any income derived from the assets received by an infant beneficiary via an inter vivos trust as excepted trust income.

Excepted trust income arguments

As is well understood, pursuant to Div 6AA, and in particular, s 102AG(2)(a)(i), excepted trust income is the amount which is assessable income of a trust estate that resulted from a will, codicil or court order varying a will or codicil.

The case of The Trustee for the Estate of the late AW Furse No 5 Will Trust v FCT (1990) 21 ATR 1123 (Furse) is one of the few reported decisions dealing with Div 6AA.

In that case, the Federal Court noted that provided a trust estate was created by a will, then any income of the trust estate (including a testamentary discretionary trust) is excepted trust income. The only particular limitation placed on the provisions by Justice Hill in Furse was that the parties must be dealing on an arm's length basis when deriving the income. Importantly, the requirement was not that the parties must in fact be arm's length but that the income was equal to an amount that would be derived had they been dealing at arm's length.

Section 102AG(1) requires that a trust have a prescribed person (relevantly in most situations, an infant, subject to certain exceptions in s 102AC(2)) as a beneficiary.

Importantly, s 102AG(1) does not expressly exclude an indirect interest as being a beneficiary for the purpose of the provisions.

Therefore, it is often argued that the income of the "trust estate" contemplated in the opening words to s 102AG(2) does not need to be the same trust estate.

This in turn means that any income received by an infant beneficiary derived from assets originally sourced from an estate, via an inter vivos trust (ie after distribution of certain assets from a testamentary trust to an inter vivos trust) should be treated as excepted trust income.

That is, the relevant income will be income that is excepted trust income "in relation to a beneficiary of the trust estate (that is, an inter vivos trust) to the extent to which the amount – (a) is assessable income of a trust estate (that is the testamentary trust) that resulted from – (i) a will (that is the will of the willmaker that created the testamentary trust)".

Section 102AG(4) does provide that an amount will not be treated as excepted trust income if it was derived by a trustee as a result of an agreement entered into for the purpose of securing that the income would be excepted trust income.

Arguably this restriction does not apply in the factual scenario outlined above because the income derived via the assets transferred to an inter vivos trust would have been excepted trust income in the testamentary trust.

The above arguments are largely supported by Private Ruling authorisation number 1012603789935.

Tax Office position

In rejecting the above arguments, the Tax Office confirms in the Ruling that income distributed by the inter vivos trust would not be excepted trust income.

In particular, the Ruling states as follows –

• Furse is authority for the proposition that excepted trust income can be sourced via a testamentary trust under a will with assets not necessarily the property of the willmaker at the date of their death;
• Furse is also authority for saying that inter vivos trusts can never create access to excepted trust income, unless the relevant trust is mentioned in the will; and
• this essentially means assets would need to be distributed directly under a will pursuant to a specific direction to an inter vivos trust before the income of the inter vivos trust will be considered excepted trust income.

Lessons

A number of lessons can be taken from the Ruling, including:

• The Tax Office, as has been long assumed, is likely to take a relatively narrow view to interpreting the excepted trust income rules under the ITAA 1936.
• This narrow interpretation is despite the longstanding and widely accepted principles set out by Justice Hill in Furse.
• Where possible, if access to excepted trust income is important to a willmaker, personally owned assets should be distributed to a trust created under a will (ie a testamentary trust), not a pre-established inter vivos trust.
• Willmakers not domiciled in South Australia looking to create a "perpetual trust" (ie set up under South Australian law to potentially avoid the need to have a vesting date) need to accept there will be risks with also accessing excepted trust income via the structure, if the Tax Office continues to look for ways to narrow the interpretation of s 102AG of the ITAA 1936 and the decision in Furse.
• Depending on the situation, and in particular the terms of the will, for trustees of existing testamentary trusts wanting to restructure assets and still maintain access to the excepted trust income concessions, a form of trust cloning relying on PSLA 2003/12 may be appropriate.

Image credit: GotCredit cc

When will a multiple testamentary trust be preferred?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘When will a multiple testamentary trust be preferred?’ at the following link - https://youtu.be/JXOrmklYY8Y

Again, for ease of reference, earlier posts addressing similar issues are at the following links - http://blog.viewlegal.com.au/2012/11/single-v-multiple-testamentary-trusts.html http://blog.viewlegal.com.au/2012/11/single-v-multiple-testamentary-trusts_26.html

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

Interestingly, the reasons supporting use of multiple trusts are almost a mirror image to those supporting a single trust. The practical reasons include where the underlying beneficiaries are all adults, spread all over the world, or simply don’t get on. For any of these reasons it would often be impractical to lock them inside one structure.

Similarly, if there are different risk profiles or investment objectives for each of the underlying main beneficiaries, that would be another reason that a multiple trust would be preferable.

Again, what the underlying assets of the estate are can also be a big driver towards supporting use of multiple testamentary trusts.

For example, if there are particular assets that need to go into direct control of particular beneficiaries, then again the multiple trust structure will be the preferred approach.

Multiple trusts can be of particular use where there is a need to have different control mechanisms in relation to different components of the estate.

This can be particularly relevant to people who are concerned about the mental stability of a beneficiary or a beneficiary has a physical disability, then this in itself can be a driver to regulate part of the estate in a certain way through a testamentary trust and then have a separate trust to manage other parts of the wealth.

When will a single testamentary trust be preferred?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘When will a single testamentary trust be preferred?’ at the following link - https://www.youtube.com/watch?v=-tI21UwLNnw

For ease of reference, earlier posts addressing similar issues are at the following links -

http://blog.viewlegal.com.au/2012/11/single-v-multiple-testamentary-trusts.html

http://blog.viewlegal.com.au/2012/11/single-v-multiple-testamentary-trusts_26.html

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

The issues around the appropriateness of a single testamentary trust structure are really driven by the practicalities and the exact factual framework that a particular client finds themselves in.

The obvious one and the most common scenario would be where the family is quite young (for example), all children who are beneficiaries are under the age of 18. Another of the reasons is if asset protection is a core goal.

Generally, the conservative view is that using one trust, as opposed to multiple trusts, will provide a stronger level of asset protection.

Other issues include where the overall framework of the people making the estate plan is one where they want to see the beneficiaries more as a custodian of wealth, as opposed to being a direct recipient.

Probably the last main example would be where the underlying assets don’t lend themselves to a structure, other than being inside a single testamentary trust. A classic example would be a business interest or a large property holding. In this type of scenario, it's normally the case that a single trust would be preferred, as opposed to a multiple testamentary trust structure.

Superannuation proceeds trusts: Tricks and traps

For those that do not otherwise have access to the Weekly Tax Bulletin, the further article from earlier this month by fellow View Legal Director Patrick Ellwood and me is extracted below.  It provides a more technical analysis of the various issues surrounding superannuation proceeds trusts, building on the discussion in recent posts.

A superannuation proceeds trust (SPT) is a trust established solely to receive superannuation proceeds on the death of a fund member.  A SPT can be established by a will or by deed after the death of an individual, although establishing the structure post death can be problematic and is outside the scope of this article.

The ITAA 1997 provides that a superannuation death benefit, paid to a death benefit dependant as a lump sum, is not assessable income.  A death benefit dependant (defined under s 302-195 of the ITAA 1997) is a:

• spouse or former spouse of the deceased;

• child, aged below 18, of the deceased;

• person with whom the deceased had an "interdependency relationship", as defined by s 302-200 of the ITAA 1997; or

• person financially dependent on the deceased just before they died.

Payments to the estate

Where there are death benefit dependants under a deceased estate who are potential recipients of superannuation benefits, it is often an appropriate estate planning strategy to allow for a separate SPT under the will in addition to any testamentary trust (TT), so that a tax-free distribution of the superannuation proceeds can be achieved via a protected structure.  Other estate assets can be distributed to a TT that has beneficiaries who are not death benefit dependants.

When the superannuation proceeds are paid to a SPT, the legal personal representative (LPR) is taxed in accordance with how the person or persons intended to benefit from the estate would be taxed were they to have received the payments directly.  That is, ATO will generally adopt a "look through" approach as if the death benefit had been paid directly to the recipient.

To ensure that any receipt of superannuation proceeds is tax-free, the LPR should ensure that, at least at the time of receipt of the superannuation proceeds by the SPT, the only capital beneficiaries of the SPT are those who meet the definition of "death benefit dependant" under s 302-195 of the ITAA 1997.

In practical terms, this means that where there is more than one death benefit dependant, the terms of the SPT should provide that they receive the trust capital in specified shares on vesting.

In particular, ATO Interpretative Decision 2001/751 (which has since been withdrawn on the basis that its view has been subsumed into s 302-10 of the ITAA 1997) confirms that it appears to be the clear intention of the legislation that the fact that a payment is made to a trustee, rather than directly to the dependant, should not obscure the fact that the payment is ultimately for the benefit of the dependant.

In the facts considered in ATO ID 2001/751, the death benefit dependant was the sole beneficiary of the trust and, therefore, absolutely entitled to the income and capital of the trust.

Income beneficiaries of a SPT

The requirement that death benefit dependants receive the capital on the ending of the trust is also driven by the requirements of s 102AG(2) of the ITAA 1936, which sets out the basis on which trust property must be regulated when the trust ends, in order to access the excepted trust income provisions.  The excepted trust income provisions effectively allow infant beneficiaries of income distributions to be taxed as adults.

There is limited guidance about whether the ATO will require all the income beneficiaries of a SPT to be death benefit dependants.

The conservative position would be to limit the income beneficiaries of the SPT to death benefit dependants only.  In particular, the guidance available in relation to whether tax will be payable on receipt of the superannuation proceeds under s 302-10 of the ITAA 1997 indicates that the income and capital beneficiaries should be limited to death benefit dependants.

It is arguable however, based on the ATO's comments in Taxation Ruling TR 98/4, that a SPT can include a broad range of discretionary income beneficiaries.  While TR 98/4 sets out the ATO's view in relation to child maintenance trusts (see 2015 WTB 11 [287]), it can by analogy be argued that the comments apply to other similar types of trusts (including SPTs).

Furthermore, in practical terms, it appears that the ATO only tests the range of potential beneficiaries of the SPT at the date at which the superannuation proceeds are received by the SPT (for example, see private ruling authorisation number 1011741138466). 

Therefore, even if a trustee takes the conservative approach, that is, to limit the range of potential income beneficiaries to death benefit dependants, following receipt of the proceeds, it may be possible for the range of beneficiaries to be expanded to include non-death benefit dependants.

Below is a diagram giving an example of making distributions under a will to a TT and a SPT.

Provisions of a will

For completeness, as superannuation proceeds do not automatically form part of the estate of the deceased member, it may be necessary to ensure that appropriate nominations are made by the member to direct that the superannuation death benefits are paid to the LPR for distribution under the will, and if appropriate, to any SPT established.

Assuming proceeds are paid under a will, the LPR should have the power to ensure that the range of potential beneficiaries can be limited to persons: 

• within the provisions of s 295-485(1)(a) of the ITAA 1997; and
• who satisfy the definition of "death benefits dependant" under s 302-195 of the ITAA 1997.

The main reason both these provisions should be mentioned is due to the requirement under s 295-485(4) that regard needs to be had to the extent to which a death benefit dependant can reasonably be expected to benefit from the estate.

In particular, s 295-485 of the ITAA 1997 gives superannuation funds the ability to claim a tax deduction based on an increased amount of superannuation lump sum death benefit paid under the "anti-detriment" rules, with reference to the tax paid on contributions.

Conclusion

In many respects, the ability to utilise a SPT under a will incorporating a TT is a simple, yet powerful, strategy that practically is useful in a large range of circumstances.

There are however some fundamental threshold issues that need to be addressed to ensure the expected income tax concessions can be validly accessed.  Furthermore, given the significant number of estate planning related issues aside from tax that are potentially relevant, it is critical that a methodical approach is adopted.

Image credit: Martin Howard cc

View Legal and superannuation proceeds trusts

Last week’s post explained the broad requirements and main benefits of a Superannuation Proceeds Trust (SPT) established under a will. This week’s post focuses on how View Legal’s testamentary trust (TT) wills deal with any superannuation benefits that are paid to a will maker's estate.

Generally, the range of potential beneficiaries listed under a TT are wider than dependants for tax purposes. The way in which View Legal crafts its TTs however gives the trustee complete discretion about which of the beneficiaries may receive any superannuation benefits available for distribution.

In particular, the terms of the will allow the trustee to essentially establish a 'sub trust' of the TT for receipt of the superannuation proceeds – with the only beneficiaries being those who satisfy the definition of a tax dependant.

In this way, the various benefits of having a SPT, as outlined in last week's post, can be achieved.

If the trustee chooses to utilise a SPT, an example of how the estate assets could flow is as follows:

Image credit: Adrian Ruiz cc

Why superannuation proceeds trusts should only be an avenue of last resort

A 2014 post touched on the use of a superannuation proceeds trust (SPT) - http://blog.viewlegal.com.au/2014/09/what-are-superannuation-proceeds-trusts.html.

The question arose because of a decision to avoid establishing testamentary trusts on the death of one spouse. 

As identified recently by one adviser we work with, such an approach was arguably not appropriate in all the circumstances because:  

1. SPTs are generally a structure of last resort.  This is for a combination of reasons, not least of which because under superannuation law there is no clear pathway to allow a superannuation trustee to distribute to a SPT; and 

2. Conversely under taxation law, unless the money passes directly from the superannuation fund into the SPT, there is a real risk that the Tax Office will not allow access to the excepted trust income provisions. 

For these reasons it is generally preferable that the funds are paid to the legal personal representative and then distributed under the will into a testamentary discretionary trust which is crafted in a way to create a 'sub-trust' in relation to the superannuation proceeds. 

This approach ensures that the surviving spouse will have the flexibility to have all funds in a trust environment while also ensuring the proceeds are received tax free into the estate. 

Image credit: Alan Cleaver cc

Impact of the Spry decision on trusts

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Impact of the Spry decision on trusts’ at the following link - https://youtu.be/mFkCvyZaqZs

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

There is no doubt that immediately following Spry, basically everyone was assuming that the position moving forward would be that no matter how you set up a trust, and no matter if it was a family trust or a testamentary trust, it would never provide any level of asset protection at all. 

However, the reality in relation to Spry is that a lot of the reasons for it having such a radical impact in that particular scenario were really driven by the factual circumstances of the case.

For example, there were allegations, though not proven, neither were they disproven, regarding mismanagement of trust assets, deliberate threats to actually destroy trust property, and deliberate attempts to mislead the judges through the various stages of the court process. 

If you look at Spry in the context of these allegations, in terms of the wider factual scenario, and some of the subsequent cases, it's probably fair to say that you can distinguish a lot of the general trust structuring planning is in this area, away from the decision of Spry itself.

Until next week.

Using discretionary trusts to protect inheritances

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Using discretionary trusts to protect inheritances’ at the following link - https://youtu.be/lkkevmdo4MU

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

Historically, the reality has been that no matter if it’s a normal family trust or some form of testamentary trust, there's been a general acceptance that the Family Court could attack the assets of that trust in particular circumstances.

However, if it was structured appropriately, and care was taken in terms of how the trust structure was setup, then the assets of a trust would generally be quarantined.  The concern in recent times has been the decision of Spry, which received a lot of media attention. 

That decision seemed to create the impression, on the face of it, that no matter what form of structure was setup - family trust or testamentary trust - and no matter how that was crafted in terms of the control structure of the arrangement, the assets of the trust would always be completely exposed. So, obviously a decision that created a radical change in terms of the way people approach setting up trust structures.

Until next week.

Division 6AA and child maintenance trusts: there are advantages, but pitfalls too

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

In the context of deceased estates (and specifically with the use of testamentary trusts), the excepted trust income rules under Div 6AA of the ITAA 1936 are well known.

In particular, the rules allow income derived by infant children via distributions from a testamentary trust to be assessed at the normal, individual adult rates.  As a result, each infant beneficiary can receive over $20,000  of income tax-free and the balance is taxed at the adult marginal rates.  For most families, this can mean significant tax planning opportunities.

In the vast majority of cases, access to the excepted trust income concessions is only available following someone's death.  One key structure that falls outside this general position however is a "child maintenance trust" (CMT).

A CMT is another form of trust contemplated by Div 6AA that should be at least considered whenever there is a personal relationship (referred to as a "family") breakdown and either party is responsible for making child support payments.  This is because a validly established CMT can also create access to the excepted trust income provisions and the resulting tax concessions.

Given the significant percentage of personal relationships that breakdown irretrievably, many of which then result in child maintenance obligations being imposed, it is important that practitioners are aware of the planning opportunities afforded by CMTs.

What is a "family breakdown"?

Section 102AGA of the ITAA 1936 defines a transfer of property as a result of a "family breakdown" to include legal obligations arising from a range of situations such as:

• The breakdown of a formal marriage.
• The breakdown of a de facto relationship.
• Where a child has been born outside a "traditional" relationship arrangement (for example, a "one night stand").

CMTs are potentially available in relation to children who are:

• born of the union of the relationship that has broken down;
• adopted children; and
• step-children.

ITAA 1936 and excepted trust income

CMTs are specifically provided for in s 102AG of the ITAA 1936.  As noted above, the main advantage of a CMT from a tax perspective is the ability for income of the trust to be treated as excepted trust income. 

A CMT, like most trusts, must be established by deed but, in contrast to many of the other types of trusts contemplated by the excepted trust income rules, cannot be created by a will. 

There are also other requirements that must be met before the income of the trust is treated as excepted trust income, including:

1. the children named as the "primary beneficiaries" of the trust must be younger than 18 at the time the trust is established;
2. income must be derived by the investment of property transferred to the trustee of the trust for the benefit of the primary beneficiary/beneficiaries, as a result of a "family breakdown", as set out above;
3. there is no set time frame in which a CMT must be established following the family breakdown, although they should ideally be set up at the time of the property settlement; and
4. the children for whose benefit the trust is established must ultimately receive all of the capital from the trust in equal shares.

Both in relation to tax planning and asset control, it is important to note that potential income beneficiaries of a CMT may include persons other than children of the relationship subject to the family breakdown, without jeopardising access to the excepted trust income concessions.

Non-arm's length arrangements

The income of a CMT can be generated from non-arm's length arrangements.  However, any income which results from non-arm's length transactions must be of equal value to that which would have been derived on an arm's length basis in order to be considered excepted trust income.

The arm's length requirement is set out in detail in s 102AG(3).  In particular, this section provides that if any 2 or more parties to:

• the derivation of excepted trust income; or
• any act or transaction directly or indirectly connected with the derivation of that excepted trust income,

were not dealing with each other at arm's length, then the excepted trust income (if any) is only so much of that income as would have been derived if they had been dealing with each other at arm's length.

Due to the strict requirements for a valid CMT, particularly on the ultimate vesting of the assets in the children of the relationship that had a family breakdown, one approach often used is to contribute depreciating assets such as plant, equipment and motor vehicles to the trust. These assets can be leased, either to a related individual or business entity for value.

Provided the lease repayments are on an arm's length basis, then the income will be able to be distributed to infant children as excepted trust income.

Other issues to consider  

While there can be tax planning advantages to utilising a CMT, there are also a number of potential pitfalls (in addition to the matters set out above).Some of the things to specifically consider before establishing a CMT include:

1. Taxation Ruling TR 98/4 which sets out in detail the Commissioner's position in relation to CMTs and should be studied carefully before implementing the structure.
2. The CGT relief afforded by Div 126-A of the ITAA 1997 due to a marriage breakdown does not extend to assets transferred to a CMT.
3. Similarly, in relation to non-capital assets (eg depreciating assets), there will generally be no roll-over relief available for asset transfers to the CMT.
4. Generally there will also be no stamp duty relief available for dutiable assets transferred to a CMT, although anecdotally it appears some State Revenue Offices do allow an exemption.
5. It is often extremely difficult to establish a CMT unless both parents work collaboratively, which obviously may not be the case where the personal relationship has otherwise broken down.

Until next week.

Image credit: Steve Corey cc