Getting assets into a testamentary trust

Discussion in 'Wills & Estate Planning' started by Bob Mullin, 14th Nov, 2019.

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  1. Bob Mullin

    Bob Mullin Active Member

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    Hi everyone

    I had a couple of questions I was hoping you could help with.

    1) is it possible to setup a discretionary trust so that it vests to the appointor (being one of the beneficiaries) on the death of the appointor? Thought this would be a good way to get the assets of the discretionary trust into a testamentary trust. Would this trigger a CGT event/stamp duty?

    2) would it be possible for Bart to provide a promissory note (or some other form of debt) to a company (owned by Homer) that was only payable upon Homer's death? The intention would then be that Homer's will would provide for the shares in that company to be bequeathed to Bart with a testamentary trust. On Homer's death, Bart could assume control of the company, and request payment from himself in his personal capacity (or potentially forgive part of the debt if it was more than Bart wanted to pay) thereby allowing Bart to contribute funds to a testamentary trust after Homer's death.

    Thanks
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney

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    1. Yes assuming the appointor is a beneficiary. I have done this for a few clients. Need to consider the ability to change the deed so this doesn't happen in case needs change.

    2. Don't know about that but it is possible other ways to do something similar.
     
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  3. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Recent tax law changes impact a TT that adds other assets arising after the testamentary bequest. The tax concessions which particularly benefit minors are stripped from new assets added to a TT. Once a TT could be commenced with say $50K and then the family could add other wealth eg $500K. Now his isnt permitted and the TT benefits would only apply to the $50k of assets as excepted income. The other $500K would be subject to the same rules as a disc trust. The terms of a TT may be more restrictive than a disc trust too. Definitely one for legal advice.

    Promissory notes are a common element of a scheme. Often illusory and doubtful about statutory enforcement. The key issue for a company is a debt must be in existence ie Bart must have lent $$$ to the company. Not Homer. A creditor cant assume control of a company excepting actions under the Corporations Act for insolvency which may see the company wound up and liquidated to discharge all assets and liabilities and if any surplus exists to pay shareholders. Debt forgiveness and CGT laws may impact too.
     
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  4. Bob Mullin

    Bob Mullin Active Member

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    Thanks for your time Paul. The way I had envisaged this working is that because the promissory note was issued to the company and was essentially therefore an asset of the company before the testamentary bequest, this would not fall foul of the tax law changes which apply to assets added after the testamentary bequest.

    With regards to the promissory note, the intention was that this would be a debt owed by Bart to the company (not a debt owed by the company to Bart). It would be say a $3m promissory note. On Homer's death, the debt would become payable. Say Bart had $2m he wanted to contribute to the TT. The company would be bequeathed to Bart through a TT, and having control of the TT as the sole shareholder of the company, he could appoint himself director and agree to forgive $1m of the debt and demand payment of $2m. Bart pays the $2m in. Given this an asset of the company prior to the bequest, it would hopefully be entitled to the full benefits of TT status (i.e. minors taxed as adults).

    I suppose a similar outcome could be achieved by Bart gifting funds to company and the company lending them back to Bart and probably is less illusory that way.
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney

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    why a company at all?
     
  6. Bob Mullin

    Bob Mullin Active Member

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    You're probably right - maybe a company isn't necessary. I was concerned that there would be a debt obligation owed by Bart to Homer, and then if the benefit of that debt were held in a TT for the benefit of Bart, that could potentially collapse the debt, but perhaps it's OK if the TT had a corporate trustee. Does that sound right?
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney

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    no
     
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  8. Bob Mullin

    Bob Mullin Active Member

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    So you think a company would be needed? Appreciate we're getting into the weeds here.
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney

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    no.

    You then have corporations act applying. Should be avoided.
     
  10. Bob Mullin

    Bob Mullin Active Member

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    Thanks Terry - will steer clear. Any ideas of how to achieve the same kind of outcome or would Bart just need to gift the money before Homer's death?
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney

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    multiple ways
    gift and borrow back
    assignment of debt
    loans
    forgiveness of debt
    vesting of a discretionary trust
    gifts
    options
    life interests
     
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  12. Bob Mullin

    Bob Mullin Active Member

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    Sorry to be pain. Could you elaborate on how the gift and borrow back would work? I thought that was what I suggested above and that you thought it wouldn't work without the company and that we should steer clear of if using a company.
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney

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    Bart wants to inherit assets via a testamentary discretionary trust when Homer dies right? If so he could gift those assets to Homer now and borrow them back so he can still use them as before. If cash this would be simple to do.
    He might also gift those assets to a discretionary trust which is set up with Homer as the capital beneficiary and his death triggering a vesting of the trust to Homer.

    But Bart has to consider that he might die before Homer.
     
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  14. Bob Mullin

    Bob Mullin Active Member

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    So there is no issue with the benefit of the loan from Homer to Bart (i.e. the debt owed by Bart to Homer) being bequeathed to Bart? Or is it that it wouldn't be directly bequeathed to Bart, but just instead increase Bart's share of the common pool of assets that would then go into the TT for Bart's benefit?

    With the second suggestion (the discretionary trust), would the gift to the discretionary trust need to occur before death? In which case, is this the same as the gift and loanback but just interposing a discretionary trust?
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney

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    There are plenty of issues. Homer would be leaving the asset to the trustee of a discretionary trust set up in the will, not to Bart. Loans can also be forgiven. It all depends on how the will is drafted.

    The gift to the trust would need to occur before Homer died.
     
  16. Bob Mullin

    Bob Mullin Active Member

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    Right! Could this potentially work?

    Bart gifts $100k to Homer, Homer lends $100k back to Bart. Under Homer's will, three TTs will be setup each with corporate trustee's controlled by Bart, Lisa and Maggie respectively. The will would provide that the Bart-controlled TT would receive so much of the $100k as he has repaid at the time assets are available to be distributed, and the remainder would be split 3 ways into the 3 TTs. If Bart only had $60k, the executors forgive $40k (assuming the will expressly gives them the power to do this).
     
  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney

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    Yes, I set up something similar for a person who actually died and it all worked out as planned. legal advice is needed of course as many issues.
     
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  18. Bob Mullin

    Bob Mullin Active Member

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    Thanks Terry!
     
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  19. Trainee

    Trainee Well-Known Member

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    Is it possible to not forgive the remaining loan to Bart, and just keep that as an asset in the TT? As a form of asset protection for Bart.
     
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  20. Bob Mullin

    Bob Mullin Active Member

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    I got the impression it's not possible to bequeath the benefit of the debt (as opposed to the repayment proceeds that Bart actually pays to Homer's estate) to a TT that Bart controls?