Death and no testamentary trust – what can you do?
Estate Planning Update – Spring 2013
Testamentary trusts are usually a must-have where children are concerned. Apart from the usual benefit of taxing children at normal adult rates, the benefit of testamentary trusts was enhanced on 1 July 2012 when the tax-free threshold increased from $6,000 to $18,200.
Where the deceased did not provide for the establishment of a testamentary trust in their Will, s 102AG(2)(d) ITAA 1936 may allow limited but tax effective trust distributions to be made to minor beneficiaries if a new trust is established within 3 years of the date of death by deed and in accordance with the requirements of Division 6AA ITAA 1936.
The most significant limitation of the above trust is that the excepted trust income for each minor beneficiary cannot exceed (s 102AG(7) ITAA 1936) the amount that “…would have been included in the assessable income of the beneficiary of the year of income in respect of an amount…derived by the beneficiary from property that…would have devolved directly upon that beneficiary if that deceased person had died intestate.”
The reference to the amount that would have devolved is a reference to notional intestacy. Any income derived from property in excess of the notional intestacy amount is assessed on the basis of the standard inter vivos trust, which includes punitive rates for distributions to minor beneficiaries – s 102AG(7) ITAA 1936.
Moreover, under the terms of the deed establishing the trust, the property must be transferred beneficially to the minor beneficiary and the terms of the trust must provide that the minor beneficiary has an absolute vested interest, that is, on the vesting of the trust the minor beneficiary will acquire both legal and beneficial ownership of the property. The terms of the deed must also provide that if the minor beneficiary were to pass away before the end of the trust, the property would pass into the minor beneficiary’s estate. It follows that no form of life estate for a minor beneficiary is appropriate property for a tax-effective trust in this regard.
The trust for minor beneficiaries is tax-effective only to the extent that its income is from property that was derived from property that devolved from the estate of the deceased person, i.e. the estate assets remaining after the estate liabilities are discharged.
Testamentary trusts are distinguishable from the S102AG trusts in that testamentary trusts permit income derived from other sources to be excepted trust income – see Trustee for the Estate of the late AW Furse No. 5 Will Trust – v – FCT 91 ATC 4007 at 4018 per Hill J.
It is important to beware that a life insurance payment or a death benefit payment, for example, from a superannuation fund, paid directly to beneficiaries named by the deceased rather than paid to the deceased’s estate, will not qualify to be the property of the S102AG trust.
But tax-effective distributions to minor beneficiaries may be made of income from investment of these amounts if they are held in an inter vivos trust created after the death and the deed if drafted correctly – s 102AG(2)(c)(iv) – (v) ITAA 1936.
No 3-year rule applies to these amounts, but having a good understanding of TR 98/4 is likely to be of considerable assistance in drafting the document: the ATO continues to take it into account when negotiating a tax dispute in respect of s102AG.
Contact our Estate Planning Lawyers North Sydney for further advice 9964 0022