Matthew Burgess, director of View Legal, said once assets are removed from a testamentary trust to something such as an inter vivos trust, the ability to benefit from the excepted trust income regime ends.
An inter vivos – literally ‘between the living’ – trust is created between living persons. This type of protective trust may be established to safeguard assets for a vulnerable person. One person, the settlor, creates a trust to benefit a nominated beneficiary.
A testamentary trust (or will trust) is created when an individual dies and the trust is detailed in their last will and testament. As the establishment of a testamentary trust does not happen until death – it is, by nature, irrevocable once death occurs. The testamentary trust is a provision made in the will that instructs the executor of the estate to create the trust.
Mr Burgess said testamentary trusts were advantageous as they allowed for the access of ‘excepted’ trust income rules and ensured infant recipients were taxed as adults.
“The Tax Act only allows excepted trust income in relation to the amount which is assessable income of a trust estate that resulted from a will, codicil or court order varying a will or codicil,” he said.
Historically, legislation didn’t appear to expressly exclude an indirect interest as being a beneficiary for the purpose of the provisions.
“This meant that as one example, any income received by an infant beneficiary derived from assets of a testamentary trust created under a deceased estate that may have been transferred to an interposed inter vivos trust, may be able to be treated as excepted trust income,” Mr Burgess said.
However, he also warned that rules apply that say an amount will not be treated as excepted trust income if it was derived by a trustee ‘as a result of an agreement entered into for the purpose of securing that the income would be excepted trust income’.
“Previously, this prohibition was thought to not apply to income derived via an interposed inter vivos trust as the income would have in fact been excepted trust income in the testamentary trust from which the assets were sourced,” he said.
There are a number of Private Ruling which do support this interpretation, he said.
“However, since changes that were made in the 2018 budget, the rules are now clear.
“Those state that access to excepted trust income is only possible while the assets of the deceased are owned via the testamentary trust under that person’s will.
“Once the assets are removed from the testamentary trust, for example, to an inter vivos trust, the ability to benefit from the excepted trust income regime ends.”
