Matthew Burgess, director of View Legal, said in light of fundamental changes to the taxation regime and the expanding wealth of Australia’s aging population, there is a growing need for estate planning to utilise appropriate structuring.
A testamentary discretionary trust is a discretionary trust set up in a will. It differs from the main type of discretionary trust that is set up by a trust deed while the beneficiaries are still alive. This latter type is called an inter vivos trust by lawyers and a family trust by everyone else.
“It is well established that wills utilising testamentary trusts should be the starting point for any comprehensive estate planning exercise to ensure wealth passes efficiently to the intended recipients and that the transfer takes place at the intended time,” he said.
“The difficulty in many estate planning exercises is that serious attempts to devise and implement a plan are often not made until some ‘triggering event’ stimulates action.”
Mr Burgess said often the triggering event, such as marital breakdown or illness, can jeopardise putting appropriate strategies in place.
Many solicitors are now also recommending them thanks to tax benefits and protection from kids’ estranged spouses.
“Most trusts are governed by a trust deed which sets out how the trust must be run, what the trustees can do in running the trust and who the beneficiaries are,” Mr Burgess said.
“Discretionary trusts have been used as a tax effective asset-owning vehicle for a long time and as such there are a number of trusts that are governed by trust deeds that were drafted when the tax and trust laws were significantly different.”
One of the primary benefits of an SMSF testamentary trust is the protective barrier it forms around the assets from family law and creditor claims.
The structure ensures the assets within the trust are not held directly by the beneficiaries, thereby shielding them from potential legal disputes or insolvency proceedings.
According to law firm Abbot and Mourly, a discretionary trust enables the trustee of the trust to:
- Distribute capital to a range of beneficiaries (a person receiving a capital payment or asset of the trust)
- Distribute income to beneficiaries including streaming specific types of income such as dividends, capital gains, interest and foreign income
- Conduct business and other operations including investment for the benefit of the beneficiaries of the trust
The trustee has a wide range of discretion which it exercises generally each year, no later than 30 June, so that the trustee is not taxed on the trust’s income at 45 per cent. By streaming income and specific types of income enables the trustee to spread the income around ensuring that the tax liability is spread across the family thereby lowering overall family average tax rates.
Plus having assets in a trust protects them from beneficiary and trustee creditors.
He said often testamentary trusts are structured to limit the range of beneficiaries to “lineal descendants”, where the will maker restricts the discretionary powers of the trustee so they may only distribute income or capital (or both) to the will maker’s children and grandchildren, excluding any spouse of the children and/or grandchildren.
“It is necessary to review a trust deed periodically to ensure that it allows the trustees to operate the trust in the most tax-effective way,” he said.
“Generally, testamentary trusts are seen as particularly useful to ensure concessional tax treatment is available to distributions of capital and income to infant beneficiaries as well as to protect accumulated wealth from wastrel or spendthrift beneficiaries.
“They are also good to ensure infant children or disabled beneficiaries are cared for and to help protect inheritances from attack by the Family Court and trustees in bankruptcy as well as avoiding an unintended loss by a beneficiary of their government-sourced pension or other benefits, although there is limited scope for this.”
From what I understand, while this may just be a or confused with a labelling issue, sometimes a structure of superannuation proceeds trust is promoted, particularly in the context of 102AG (2) (c) (v). I am not sure whether there is any further guidance on how is it that some super funds are capable of making a direct payment to a trustee of a SPT and still comply with superannuation rules? Maybe there is a positive inference if the SPT trustee is also a LPR of the deceased but if it’s not, not sure how super proceeds trust as contemplated in 102AG fit the narrative?
Thank you for your advice Technical Financial – entirely agreed with you; however depending on whether the post death SPT is beneficiary funded or spouse funded there is generally a pathway available (as is often the case will depend on the exact factual matrix)
Regards
Matthew Burgess
Hi Matt, Just for clarification, are you suggesting that a super trustee can pay the trustee of an SPT and bypass the estate and hence probate? Notional estate problems notwithstanding. Apologies if I have misinterpreted this post.
Dear David
Yes – depending on the factual matrix there are generally pathways available to achieve this outcome; subject as you say to the notional estate regime.
Regards
Matthew
Hi Matthew,
Thank you for taking the time to reply. Very much appreciated.
I would be interested to hear your thoughts on how a payment to SPT trustee, who is not a LPR of the deceased member, satisfies Section 62 SIS (Sole Purpose Test), where for example, it states:
(iv) the provision of benefits in respect of each member of the fund on or after the member’s death, if:
(A) the death occurred before the member’s retirement from any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged; and
(B) the benefits are provided to the member’s legal personal representative, to any or all of the member’s dependants, or to both;
I understood the application of death benefits applied towards a post death SPT within 3 years of death and impact on excepted income for minors based on the Commissioner’s favourable view on receipts by spouse rather than ‘devolved’ to the spouse from the estate but that seemingly is a 102AG ITAA issue.
I am not sure how one gets around Section 62 in SIS given that a payment by and large can only be made to a LPR or dependents, other than the exception provided in SISR 6.22B
“When benefits in regulated superannuation funds may be cashed in favour of persons except members
A member’s benefits in a regulated superannuation fund may be cashed in favour of a person other than the member if:
(a) the cashing is expressly permitted by the Regulator in a written approval for the purposes of subparagraph 62(1)(b)(v) of the Act; and
(b) the benefits are cashed only to the extent of that approval.”
Thank you for your detailed comments Technical Financial
We have seen at least 3 different pathways work in the factual situation you have flagged – however as you have also set out, much depends on the exact circumstances and the interplay with the legislation
Please make contact directly if we can assist further.
Regards
Matthew
A SMSF testamentary trust must be settled by a testamentary instrument ultimately controlled by a legal personal representative, which representative is bound by the Succession Act of the state of application. That representative is subject to family provision, equity claims, estate liabilities, etc… just as the representative is in respect to any estate asset. Furthermore, NSW courts have hurdled the payment of death benefit claims in attending to family provision (ie superannuation death benefits despite a binding death benefit nomination are not necessarily safe from family provision).
Matt is correct in his arguments for testamentary trusts – but I doubt he suggests a testamentary trust can be settled by other than a will and/or is a structure which escapes ordinary legal personal representative obligations under the applicable Succession Acts.
I believe the author has confused Matt with the new “product” and/or “strategy” offering which Abbott & Mourly is promoting to sell in their accountant and financial planning software.
Abbott & Mourly may not also appreciate the executor’s or administrator’s obligation to account for death benefits in some circumstances… which again is an attack against a separate structure on a separate basis to family provision. Unless they have a court determination to suggest otherwise, that is simply fact.
Further, the SIS laws are limited in how a death benefit can be paid – and if not to a dependent, then it must be to the legal personal representative… and in that regard, you must look to state based law and when you do, you are in family provision jurisdiction and equity.
If you work in estate administration and estate litigation (which includes dealings with superannuation death benefits), as I do, you would not suggest that death befits can be dealt with without family provision implications and/or equity claims and/or established externally to estate administration generally.
A legal personal representative is a legislative term and cannot be creatively stepped away from for the purpose of creating a new “product” or “strategy” to sell.
Testamentary trusts are incredible, and I fully agree with the strategy opportunities. A superannuation quarantine trust in a will is also valuable and has similar benefits, albeit limited by its nature of tax dependency connection. However, a SMSF testamentary trust is not something that is distinct from a testamentary trust which is subject to the same access points as any other estate asset by a court.
Thank you as always Katrina Brown
Agree with you that the pitch for the product solution may have glossed over some nuances (and not mentioned the notional estate regime).
This said, as flagged in other responses in this thread, there are forms of not will bases trusts that can have features of testamentary trusts – again however the factual matrix is critical to consider.
The asset protection issues can generally be achieved regardless; subject to your comments about the status of any estate litigation.
Regards
Matthew Burgess (View Legal)
Thanks Matt, totally agree.
The issue I have with the suggestion made by Abbott as to its new product is the suggestion that of simplicity of avoiding ordinary estate administration issues.
Those of us on the coal face are the ones who have to reset expectations when the wheels fall off… and unfortunately, that generally comes too late for the intentions of the deceased to be given effect.
Been a fan of these for decades. However super, esp SMSF’s, offer higher degrees of notional estate protection. For the funds to get to the TT they have to go through the estate first which leaves it open to more risk. Notional estate protection however is awfully difficult to manage in complex family situations no matter the vehicle short of giving all your money away long before you die.
Thank you David Lunn
Agreed with you – in NSW and other jurisdictions where the NSW rules apply, the notional estate regime is designed to prevent any planning in this area.
Subject to those rules, the strategy is predicated on funds not passing through the estate – a factor that seeks to potentially have been glossed over in some of the promotional material issued.
Regards
Matthew Burgess (View Legal)