Borrowing from testamentary trust

Discussion in 'Legal Issues' started by shelleykins, 23rd Dec, 2020.

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  1. shelleykins

    shelleykins Well-Known Member

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    I am appointor, trustee and beneficiary of a discretionary testamentary trust account which has cash in the trust bank account that was a partial capital return from an unlisted investment (remainder to be paid out in 2021). Is anyone able to clarify if this is likely to be classified as an earning of the trust that can be distributed to the beneficiaries (ie my under 18 children or I)? I don't think it is as it forms part of the original trust asset base value which has been returned as cash rather than remaining as units in the unlisted investment.

    Given that it's unlikely to be an earning requiring distribution to the beneficiaries, can I transfer a small portion to my personal bank account as a loan to me (for purpose of short-term funding of unexpected personal expenses, not asset purchases) and what paperwork/recordkeeping (and prepared by whom) would be required for the trust tax return next year to maintain testamentary trust tax benefits?

    Also is there any particular process to repay the money back into the trust or is it just simply a matter of transferring the loaned amount from my personal bank account back to the trust account?

    Trust entity/account is only relatively new, apologies for basic questions and accountant closed down for Xmas break!
     
    Last edited: 23rd Dec, 2020
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    You have 2 issues
    a) you can't legally lend money to yourself, and
    b) the trustee is only able to lend if the will allows it.


    These are legal questions so seek legal advice. You might have to change the trustee or lend to someone else. A written loan agreement should be entered into as well. No direct tax issues.
     
  3. Trainee

    Trainee Well-Known Member

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    what was the reason for appointing yourself as trustee, instead of using a corporate trustee?
     
  4. Propertunity

    Propertunity Well-Known Member

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    If it is a testamentary trust, would the person who passed away have decided on who the appointor, trustee and beneficiaries were to be on his/her death? Perhaps the OP had little choice? (I don't know, just asking the question).
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    yes exactly.
     
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  6. Trainee

    Trainee Well-Known Member

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    But the appointor can change trustees, so wouldn't that mean even if the will says my child A shall be appointor, trustee and named beneficiary, the appointor can appoint a corporate trustee before assets are transferred into the TT?
     
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  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    yes potentially
     
  8. shelleykins

    shelleykins Well-Known Member

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    Good question trainee. I just went back and checked over the paperwork from when we established the trusts and I'm not actually the trustee, we do have a corporate trustee instead that holds the assets.
     
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  9. Trainee

    Trainee Well-Known Member

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    The bank statement should be obvious. Does your personal name appear on the statement? Or the name of the trustee company?

    what do the financial statements and the tax return of the trust say? Any correspondence you receive from accountants or lawyers would contain the name of the trustee company.
     
  10. shelleykins

    shelleykins Well-Known Member

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    It's still relatively new so we haven't had to complete a tax return yet but the financial statements are in the trustee company name, not my own personal name.

    So in regard to the original question, is it possible to make a small payment from the company account to my own personal account (in the form of a loan to be repaid) without losing the TT benefits, assuming the will allows it?
    Thanks.
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    If the trust deed allows it the trustee can make a payment. But the issue is that you ideally won't want to remove capital out of the trust because if you later inject funds into the trust the income generated from those funds won't be 'excepted trust income' which means children won't get the concessional tax rates.

    The way around this is for the trustee to loan the funds to the beneficiary under a written loan agreement. Later the loan can be repaid.
     
  12. Trainee

    Trainee Well-Known Member

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    @Terry_w , is there specific reading or a section that deals with the definiton of excepted income? And when income in a tt is not excepted income (eg income from compounding, reinvestment)?

    Is it that excepted income can only be generated from assets that were owned by the deceased? Some sort of original capital concept? If so how does that definition apply to income on cash retained in a tt by keeping an UPE, for example?
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    see s102AG ITAA36 for the excepted trust income
     
  14. shelleykins

    shelleykins Well-Known Member

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    Thanks Terry. So can I transfer the money now and then prior to the tax return being completed have a loan agreement drawn up for the company
    trust loaning the money to me? Is this something the accountant can do?
    Thanks
     
    Last edited: 24th Dec, 2020
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I think the question you should be asking is 'if money is transferred now, what are the consequences of this?'

    You should be getting the trustee to lend to you under a written loan agreement. A loan agreement can be oral, but you run the risk of the ATO not believing it was a loan but a distribution of capital which was later disguised as a loan.
    Accountants can't help with any of this really as they are not part of the trust and only help with the tax return. They can't draw up loan agreements or advice on trust law. They can only give advice on the tax issues - assuming they are registered tax agents.