Important considerations highlighted with testamentary trusts

The amendment is an integrity measure to prevent assets unrelated to the estate being injected into the testamentary trust for the purpose of generating concessionally taxed excepted income, Ms Siu explained.

“SPTs have been gaining momentum in super planning as SPTs have distinct advantages over child death benefit pensions, which are limited by the modified transfer balance cap and the pension vesting requirement at age 25, except for disability pensions,” she noted.

“Most SPTs are structured as testamentary trusts under subsection 102AG(2)(a)(i) of the ITAA 1936. This type of SPT provides certainty of succession, and proper documentation is essential to ensure super death benefits will be paid to the deceased member’s estate, with the dependants as the ultimate SPT beneficiaries.”

Ms Siu said some SPTs are formed after the death of the fund member by deed under subsection 102AG(2)(c)(v). 

“These benefits devolve outside the will and are subject to certain restrictions. The latter option is often used as a ‘catch-up’ measure where, on death of the member, no testamentary trust provision is in place and the beneficiaries of the benefits are minors,” she said.

“In both scenarios, the beneficiaries of the SPT will be Tax Act dependants (TA dependants) of the deceased fund member. Super death benefits distributed to the estate with TA dependants as beneficiaries are tax-free.”

In order for distributions to qualify as excepted income under the new amendment, Ms Siu said the assessable income of the testamentary trust has to be derived by the trustee for the benefit of the beneficiary out of “property transferred to the trust from the estate of the deceased person” as a result of the will, codicil, intestacy or a court order. 

Accumulations of income or capital from such property and conversion of such property from one type to another will also meet this requirement, she added.

“This means only assets unrelated to the property of the deceased estate injected to the trust will be caught by the new provision,” she stated.

“Your income from a testamentary trust is not excepted income if it is generated from assets acquired by or transferred to the trustee of the trust on or after 1 July 2019 and that were unrelated to the property of the deceased estate.”

In terms of SPTs that are not testamentary trusts, subsection 102AG(2)(c)(v) contains a requirement, she said, that the assessable income of the trust must be derived from investment of property transferred “directly as a result of the death of a person” and, in addition, out of a provident, benefit, superannuation or retirement fund.

“This precludes injection of any asset unrelated to the death of a deceased person,” she said.

However, SPTs outside the will have a number of additional restrictions, she said. For example, the minor beneficiaries must, under the terms of the trust, benefit from the trust capital at the end.

“The death benefits must [also] be paid directly from the super fund to the trustee of the SPT and such payment must be permitted by the governing rules of the super fund,” she said.

“The trustee of the super fund can [also] potentially refuse to pay the death benefits directly to the SPT as being not in the best interest of the beneficiary, subject to the circumstances.”

Where SPTs are involved, Ms Siu said that the testamentary trust arrangement is the better option.

“It is also necessary to consider this option together with other super death benefit options available to minor beneficiaries,” she noted.

“Implementing testamentary objectives and outcomes requires expert planning and documentations.”