Tax Tip 306: Trusts, Death Near the End of the Financial Year and Tax

The trustee of a trust generally must make one or more beneficiaries presently entitled to income of the trust prior to 30 June each year. This is usually done by a written resolution.

If it is not done, then either the trustee will be taxed on the top marginal tax rate or the default beneficiaries will be deemed to be presently entitled automatically.

Where the trustee of the trust, or director of the trustee company dies just before 30 June there is often little thought given to the trust financial matters and there is no one that can make a valid resolution.


Example

Homer is trustee and Appointor of the Simpson Family Trust. It has a large income this year of $100,000.

On 1 June Homer is killed in a hot dog eating competition when he chokes on the 22nd hot dog.

The family is sad for a while and then the funeral pops up. On 29 June Homer’s son Bart is trying to figure out what he is going to get from the estate and finds out he is now the Appointor of the Simpson Family Trust now that Homer is dead. Bart needs to appoint someone as trustee in the next few hours so that they can resolve to make someone entitled to the income – but they don’t know how or who this should be.

Bart makes an appointment with the lawyer who is busy with end of year matters and can only see him on the 1st.

The default beneficiary of the trust is Marge. Marge is bankrupt.

Not only is Marge taxed at 47% (because her other income for the year was $200,000 from modelling) but the creditors of Marge will get the other $53,000 that doesn’t go to the taxman – sorry, taxperson.


Moral of the story, die post 1 July or get your family ready for trust succession.

 

Would a corporate trustee have avoided this? The trustee is still the company even with the death of a sole director and shareholder.

 

Possibly not.

 

A corporate trustee may actually be harder to comply with. The change of Director must be registered with ASIC prior to 30 June or the apparent attempt to make a resolution would be a sham if it appeared a resolution was made by a person who is not a Director. A ineffective resolution as addressed in the ruling below. Having two Directors for the trustee company may avert such issues as the surviving Director would act as a sole Director providing the company rules allow this. A reason why have a corporate trustee may asssist with survivorship v the sole human trustee problem. But if it was Bart and Homer and they both drove off a cliff then it doesnt assist.

Its possible Bart Maggie and Marge all recall hearing Homer mutter....Distribute it all to Bart ... as he was choking. ? A resolution by a sole Director need not be written and may be provided in the terms of the trust and/or company constitution. eg it may be that Bart resolves that he is fuulfilling the instructions of teh former trustee Director who muttered those words on 28th June

https://www.ato.gov.au/law/view/document?DocID=TXD/TD201222/NAT/ATO/00001

 

Dying post 1 July doesn't prevent the forthcoming 30 June from occurring however.

Your post is good food for thought. Thanks @Terry_w. EPoA of no purpose in such situations?

 

POAs cease to operate on death

 

The old oral resolution before death - I should have made the example about something other than choking!

 

Homer writes it on a serviette at moe's .... His intention needs to be clear of course. Just writing give it all to Bart probably wont be explicit. If he said / wrote "Make sure Marg know that all the income for the trust is distributed to Bart for this year" its probably clear.

I guess I was indicating that many people think resolutions must be written and some adopt some very old fashioned approaches to this eg Minutes. Minutes can be dangeous as they are meant to be a record of what meeting decisions and discussions were arrived at at a physical meeting etc. If that was not what happended is it correct ?. They can be made in other ways (eg telephone meeting) and a record of a decision can occur after.

The one that comes up at the AAT a lot is a spouse who seems to have signed (they all sign and date minutes) and then they tell the AAT they were not there. Didnt meet and didnt attend any meetings. They just signed what the accountant handed them long after 30 June...Nasty. Tax adviser problem.....

 

Creditors will get $106,000 @Terry_w . Those pesky calculations again