Tax Tip 257: Family Trust Elections and Estate Planning

Discussion in 'Accounting & Tax' started by Terry_w, 5th Dec, 2019 at 10:30 AM.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    When making a family trust election (FTE) careful consideration should be given to the potential future estate planning effects, especially on the death of the test individual.

    For a quick summary of FTEs see:

    Tax Tip 255: What is a Family Trust election? Tax Tip 255: What is a Family Trust election?


    Example

    Homer sets up Trust A to do different things such as invest in shares. A FTE is made with Homer being the nominated Test Individual.



    Homer dies, after falling off a horse.



    Bart takes over control of Trust A. The test individual is still Homer and cannot be changed.

    Bart starts up Trust B a while later. It might be used to hold property or a business and runs at a loss. Bart wants to distribute the income from Trust A to Trust B to help use up the loss and to save tax.

    Trust B would need to make sure it is in the same family group as Trust A, but it cannot nominate Homer as he is dead (Subsection 272-80(3) of Schedule 2F to the ITAA 1936), only living persons can be nominated.


    Planning ahead they might have nominated Bart as the test individual of Trust A


    See

    Subsection 272-80(3) of Schedule 2F to the ITAA 1936 INCOME TAX ASSESSMENT ACT 1936 - SCHEDULE 2F Trust losses and other deductions

    and

    ATO ID 2014/3 Family Trust Election: individual specified in election is deceased when election made
    https://www.ato.gov.au/law/view/pri...1231235958&Life=20140205000001-99991231235959
     
  2. SatayKing

    SatayKing Well-Known Member

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    Thanks @Terry_w. Always find these tips interesting.

    Just wondering when or if Selma or Patty are ever going to get a look in though.
     
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  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    Thanks Satayking, I was running out of characters to include. I was almost going to go the Southpark route, but will be able to hold off for a while now.
     
  4. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Patty and Selma make poor subjects. They barely work and have no (stable) partners. I kinda suspect at least one defacto issue may be kept silent.

    On the issue of making Bart a test individual the issue I would see is a minor cannot satisfy the control test. There are also limits as you run deeper to the family tree. I recently explored why / how a child may make a better test individual but this issue was the limiting factor. The problem with parents is taking a punt on who may live longer. I'm not convinced that a child is the solution. I wish the FTE had a death option which allowed a spouse from the same family group to be eligible for appointment when death of their spouse occurs. Its not that Bart cannot be the test individual. However there are some complications.

    I require clients to get legal advice on the issue of test individuals for this very purpose. In my opinion it is a complex issue needing legal advice. Its far more than just tax advice.
     
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  5. SatayKing

    SatayKing Well-Known Member

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    More than likely but it'd be interesting if they were nominated as guardians for Bart et.al.
     
  6. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    :eek: Ay karumba
     
  7. Mike A

    Mike A Well-Known Member Business Member

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    If bart was the nominated test individual any distributions made to selma or patty would be subject to family trust distributions tax
     
  8. Mike A

    Mike A Well-Known Member Business Member

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    With around 100 characters from various episodes you have a plethora to choose from.
     
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