Overview of estate planning and testamentary trusts

Estate planning involves developing a strategy to deal with assets after a person dies – with the legal instruments and structures, such as a will, put in place to transfer the ownership of these assets in the event of death. Estate planning and testamentary trusts

Tax is a major consideration in estate planning, and strong governance relating to the tax aspects of estate administration can help manage the risks.

A deceased estate is essentially a trust, with the executor (or administrator or legal personal representative) filling the role of trustee. But this trust essentially only exists as a legal entity until the estate is finalised, which is generally referred to as being “fully administered”. (See more on the process followed for managing a deceased estate here.)

Separate to the deceased estate A testamentary trust is a trust established under a valid will, but it’s not the same trust as the deceased estate. A testamentary trust functions in a similar way to a discretionary family trust, with certain provisions of the will operating like a trust deed.

Like any trust, a trustee of a well-governed testamentary trust will:

properly understand the tax profile of potential beneficiaries in the light of intended tax outcomeslodge a tax return for every financial year that it is in existencemaintain proper trust account records (such as trustee resolutions, detailed financial statements and reconciliations), especially where a trustee is streaming capital gains or franked dividendsfully document capital gains tax events, cost bases, and rollovers and other concessions claimed.

Depending on who is appointed as the trustee and appointor of the testamentary trust, there may need to be a high level of co-operation between family members to ensure that necessary tax, financial and other information is shared for the trust to operate effectively.

The use of testamentary trusts After the deceased estate is fully administered, the executor (or it could be someone else appointed via the will) begins to hold the assets as trustee under the testamentary trust created under the deceased’s will.

The terms of a testamentary trust may differ depending upon the provisions of the will of the deceased, however generally they operate in a similar manner to a discretionary trust. The trustee will usually have a discretion in relation to the distribution of capital and income, and the range of beneficiaries may be broad. This provides a high level of flexibility, but a well governed testamentary trust will ensure that tax outcomes are achieved and, more importantly, complex family or legal disputes can be prevented.

The benefits of a testamentary trust can be summarised as follows:

Asset protection – provided that the trust is a discretionary testamentary trust, no one beneficiary will have any claim on the assets of the testamentary trust. This will prevent the assets being exposed to a successful claim by a creditor of a beneficiary or being transferred as a consequence of family law proceedings relating to a beneficiary.Distribution of income and capital – the trustee can generally distribute the income of the trust to any one or more of the general beneficiaries, allowing the trustee to distribute the income in the most tax effective manner. The trustee will have similar discretions in relation to the capital of the trust.Income distributed to infant beneficiaries – the income generated by a testamentary trust can be distributed to infant beneficiaries and taxed in their hands at the normal adult marginal tax rates.Providing for several generations – a deceased will often wish to provide for a surviving spouse during his or her lifetime and their children thereafter. An ordinary will would generally provide that all the assets be transferred to the surviving spouse. It would then be necessary for the surviving spouse to draft his or her will to provide for their children.

The establishment of a testamentary trust allows the assets to be administered for the benefit of successive generations. The deceased can provide a direction that the testamentary trust be administered firstly for the benefit of the surviving spouse and thereafter for their children.

Further, the surviving spouse can be appointed trustee and effectively control the trust until their death or incapacity. Subsequently control can pass to the children. This allows for effective family succession planning.

Seminar: Estate Planning

This seminar provides comprehensive coverage of the key taxation aspects relevant to deceased estates, including recent legislative changes, rulings and court judgements as well as tips, traps and pitfalls pertaining to the same. Particular detail will be applied to: • Legal nature of deceased estates • The various phases of existence for deceased estates • Key income tax principles relevant to deceased estates • Overview of the capital gains tax principles relevant to deceased estates • Tax treatment of minor beneficiaries of deceased estates • Cross-border issues for deceased estates • Moving assets around to and from deceased estates: Div 152 and other issues – tax position of related entities • Stamp duty conundrums in estate planning • Tax of superannuation death benefits • Business succession – tax issues in funding the transfer • Dealing with corporate beneficiary UPEs and Div 7A Loans • Vesting dates in Trusts: CGT risks – Tax problems with life estate?

Hosted by Peter Adams, this seminar is being held on August 22 in Melbourne and August 23 in Sydney. Time: 9.00am – 12.00pm AEST CPD: 3 hours Member price: $299.00 (inc GST) Non-Member price: $350.00 (inc GST)

Sydney – 23 August 2017 

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Melbourne – 22 August 2017 

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