The dangers of a testamentary trust
Sometimes drawing a will can be just too hard. Multiple marriages, incompetent children, angry ex-spouses, complex business structures, assets overseas; the list goes on. Why not just have a will by which you delegate to your executor the discretion to determine who receives what? This is called the delegation of the power of appointment. You have been able to do this since 1 March 2008, when s44 of the Succession Act 2006 began.
And since then a number of delegation clauses have taken the less obvious form of testamentary trusts.
Section 63(1)(a) of the Duties Act NSW 1997 provides an exemption from ad valorem stamp duty or a transfer of dutiable property by the legal representative of a deceased person to a beneficiary where the transfer is “… made under and in conformity with the trusts contained in the will …”.
However, the delegation of a power of appointment is considered to have the effect of transferring the estate property to a new trust created by the executor and thereby divesting the property from the executor under the trusts created by the will (Davidson v Chirnside (1908) 7 CLR 324 at 340).
The effect of this is that the transfer of the estate property to the beneficiary ceases to be made “in conformity with the trusts contained in the will.” It is a transfer made by the executor’s resolution under the power or discretion granted to them by the delegation clause in the will.
Stamp duty applies accordingly, according to Commissioner Anthony Johnson at the Taxation Institute’s State Revenue Liaison Committee meeting in Sydney on 6 March 2012. Is he right? Don’t be the test case. See us first.
But there is more bad news for lazy testators! The CGT rollover relief under Division 128 of the ITAA ‘97 by which the capital gain at the date of death is deferred until the beneficiary later sells the estate asset, does not apply if the CGT asset passes to a beneficiary under the exercise of discretion under a discretionary testamentary trust because it is not considered to have passed to the beneficiary by virtue of the death of the testator.
Make sure you weigh up the costs in terms of Federal and State laws before exercising this new found testamentary freedom.