Tax Tip 353: A Tax Problem with Death and Trusts

Death can make trustee resolutions impossible, and this can result in the trust income being taxed at the top marginal tax rates.



Example

Homer is the sole director and shareholder of H Pty Ltd which is Trustee of the Simpson Family Trust.

Homer runs the trust and causes the trustee to make various family members presently entitled to the income of the trust. This is always done in June each year.

Homers death on 1 June 2020 causes an issue no one realises. The trust has earned $100,000 in income this year and Homer was going to cause the trustee to distribute $20,000 to each of 5 adult beneficiaries who are not working. This would result in no tax being payable on the trust income.

But Homer is dead. The funeral happens around 10 June 2020 and the accountant of the trust is in attendance (charging his hourly rate?). He waits for an opportune moment and tells Marge, as she hands him another sausage roll, that if the trustee of the Simpson Family Trust does not resolve to make someone presently entitled to the income of the trust it will be taxed at 47% - that is $47,000.

‘Bugger the wake’ Marge says as she races to the home office and digs out the various folders. She looks up the Corporations Act as well and finds out that the Legal Personal Representative of the deceased shareholder can appoint a director under s201F, but probate hasn’t been applied for yet.

This means the trustee, which is the company, is unable to act. It is like a ship adrift. No one will be able to make the trustee resolutions, no one can steer it.

Then the family’s lawyer walks past, eating a party pie, and asks what is going on. He explains it is simple, Homer appointed a successor appointor under deed, so this new appointor can sack the existing company, appoint a new company as trustee and that company can then make the trustee resolutions well before 30 June.

 

Do changes to ownership records for change of trustee need to be fully processed before the Trustee resolutions can be made?

What are some mitigating steps? Have more directors?

 

No.

powers of attorney so if death is close an attorney can act on behalf of a shareholder and change the director.
Shares held by another trust
Successor director appointments
constitution strategies.
3 equal shareholders
Do resolutions early on
default beneficiaries
are just a few

 

Other strategies :
- Alternate Director warning. This appointment ends on death !! (I mention it as it is not a practical strategy).
- Backdated appointment with ASIC (penalties apply. This timing matches with the 60 day rule in s201H)
- Affirmation of earlier undocumented resolutions made by the former Director and others by current Directors (wont work with sole Director as only shareholders can then appoint a Director ie s201H Corporation Act fails. Then consitution or replaceable rules must be followed) eg Marge hears Homer say on his deathbed - Marge I appoint you a Director of Mr Plow Pty Ltd. She is validly appointed for UP TO 60 days if that company only has Homer as Director despite there being no documented decision. For multiple Director companies the surviving may appoint Marge.
- Sole Director problems - A company cannot have no Directors and may merely have failed to report the successor Director. Correcting this defect may be a problem solver.
- NOT producing minutes but using a record of a decision or a record of a resolution.

Resolutions earlier on ? This may be a tenuous issue.. Many deeds reflect tax law which implies the net trust income is distributed according to tax law. This means a financial year unless a approved substituted accounting period is allowed. Tax law doesnt allow more than one distribution does it ? Or does it allow it if the deed specifically empowers that ? This appears the Commissioners view as the use of multiple distributions with a final 30 June one is what many ETFs and managed funds do. I conducted detailed review of 40+ discretionary deeds and I have never seen a off the shelf disc deed that contemplates more than one distribution. They adopt a silence or a implied reliance on tax law to determine the net trust income....and frequently mention "year" or even 30 June. Or contain accumulation clauses which default at 30 June if no valid distribution had been resolved. It may be wise to consider resolutions especially those made earlier carefully with that in mind as a defective resolution for part of the income may also be fatal and a fatal final resolution is certainly a concern. My preferred approach is the trustee resolves provision interim distribution/s with a final resolution for the final sum that includes any "interim distributions" for avoidance of all doubt. And also consider a default beneficiary clause should the resolution sum be defective.

 

Can a LPR act in place of an individual trustee?

 

no