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Legal Tip 123: Setting up a Testamentary Trust after someone’s Death

Discussion in 'Legal Issues' started by Terry_w, 17th Apr, 2016.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Setting up a Testamentary Trust after someone’s Death


    It is possible to set up a trust to transfer an inheritance into, even if the deceased did not set up a trust in their will. Known as an Estate Proceeds Trust or a Post Death Testamentary Trust, any income from such a trust can be taxed in the hands of children at adult tax rates under some strict conditions, found under s102AG ITAA36, including:


    1. The children would have had to be entitled to the capital of the trust if the intestacy laws applied to the deceased.

    2. The children must be absolutely entitled to the assets of the trust when it vests

    3. Assets must be transferred into the trust within 3 years of the death of the deceased.

    The weakness of this approach is that there are no stamp duty concessions on transferring dutiable property into the trust. Transferring property will also result in a CGT event.


    Nevertheless, it is still very effective where cash inheritances have been received.


    Example Tom dies and leaves behind his wife Marg and 2 children 1 and 2 years of age. Tom’s estate includes a $1mil unencumbered investment property which he demands to be sold and the cash passed on to this wife and children. Lets assume Tom lived in SA and that SA laws apply.


    Under s72G of the ADMINISTRATION AND PROBATE ACT 1919 (SA) where a person dies leaving a spouse and children the wife is entitled to the first $100,000 and then the remainder is split evenly between the spouse (50%) and the children (50%).


    In this case Marg can get the first $100,000 plus $450,000 of the remainder with the 2 kids sharing $450,000. Marg could transfer $450,000 into a trust for the children. The trustee can then invest this trust. Any income from the trust will be taxed in the hands of the children who will each get a tax free threshold of $18,200 per year.


    If the trust returns 10% pa the trust income will be $45,000 which will amount to $22,500 per child. Not much tax would be payable on this at all.


    But if Marg received the whole amount from the will and invested it herself she would have been taxed on top of her other income and could have ended up paying 49% on any income earned.


    It is still much better to set up a discretionary trust in a will before death, but this is the next best thing. The post death testamentary trust doesn’t provide much asset protection as the beneficiaries are absolutely entitled to the capital of the trust. There is not as much flexibility in streaming the income out to beneficiaries other than children of the deceased. Grandchildren will not get the same tax benefits for example. And once the children reach 18 they can wind the trust up and take their capital.


    Because of the way the intestacy laws work the above example would not have worked under NSW law because the mother would have been entitled to the whole estate.


    Legislation

    s72G of the ADMINISTRATION AND PROBATE ACT 1919 (SA). http://www.austlii.edu.au/au/legis/sa/consol_act/aapa1919259/s72g.html#prescribed_amount

    s102AG Income Tax Assessment Act 1936. http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s102ag.html