Tracing death benefit payments critical after recent law change

View Legal director Matthew Burgess said there are some concerns that the new rules do not directly address how assets, such as superannuation death benefits, that are acquired by a testamentary trust as a consequence of the willmaker’s death, but are not directly from the willmaker personally, will be treated. 

“This said, the preferred interpretation appears to be that so long as a death benefit is paid to the legal personal representative of an estate, before then passing to a testamentary trust, this should be sufficient to ensure that any income later derived will be excepted trust income,” Mr Burgess said.

However, if a death benefit passes directly from a superannuation fund to a legal personal representative in their capacity as the trustee of a testamentary trust, then there is a material risk that the death benefit will be deemed to be ‘injected’ into the testamentary trust in a manner that is caught by the new rules, Mr Burgess warned.

“This is because the payment would not strictly pass via the estate of the deceased willmaker,” he explained.

“Practically, most specialist holistic estate planning advisers tend to recommend against death benefit payments being made directly to any form of trust. This is due to the potential difficulties with meeting the legislative requirement for a superannuation death benefit payment to only be made to dependants or the legal personal representative.”

Mr Burgess said the new rules will mean it’s now more important that superannuation death benefit proceeds paid to a deceased estate are carefully traced.

“Particularly where there are tax dependants who are potential beneficiaries of a testamentary trust, there has been a long-standing need to ensure a ‘tracing' of superannuation death benefit proceeds paid to a deceased estate,” he explained.

“The new rules are likely to further heighten the need for methodical tracing in relation to superannuation death benefits. For example, assuming that the original death benefit can be used to validly create excepted trust income, given the likelihood that the death benefit payment will be converted into other assets, there will be the need to demonstrate that the source of funds for those assets was the death benefit.”

Future income, he said, will need to be traced to the original death benefit payment in order to be able to be treated as excepted trust income.

Mr Burgess said there are still significant advantages with testamentary trusts from an income tax planning perspective despite the changes.

“Not least of which because, with proper tracing and accounting, superannuation death benefits should still be a legitimate source of excepted trust income distributions,” he noted.

“Furthermore, there are a range of other fundamental reasons that most people value testamentary trusts, other than simply accessing the excepted trust income regime — for example, asset protection, limited liability, flexibility in asset management and access to the 50 per cent capital gains tax discount afforded to all forms of trusts.”