COVER Testamentary trusts post-death: bespoke planning opportunities by Matthew Burgess, CTA, Director, View Legal Abstract: It is clear that there is a growing need for estate planning to utilise appropriate structuring. Wills using testamentary trusts should be the starting point for any comprehensive estate planning exercise. The difficulty in many such exercises is that serious attempts to devise and implement a plan are often not made until some triggering event, such as financial or matrimonial misfortune, life-threatening illness or death, stimulates action. This article considers options available for implementing trust structures after death when appropriate planning was not done during a person’s lifetime, and the post-death strategies which can be used to fix estate planning problems. In such a case, it is possible to establish a trust following a person’s death, including an estate proceeds trust or a superannuation proceeds trust. The article discusses the benefits and limitations of these strategies in turn, and also includes a summary of child maintenance trusts. Introduction The focus of this article is on options (the “intestacy” rules). The set formula is In light of fundamental changes to the available for implementing trust structures different in every Australian jurisdiction. taxation regime and the expanding wealth after death when appropriate planning was There are a range of issues that determine of Australia’s ageing population, there is a not done during a person’s lifetime, and the which jurisdiction’s rules will apply. growing need for estate planning to utilise post-death strategies which can be used to The intestacy rules will also apply where a appropriate structuring. “fix” estate planning problems. person dies without a valid will in relation to all of their assets. In this regard, it can in It is well established that wills utilising Strategies where there is no testamentary trusts (TTs) should be the fact be possible to die “partially intestate”. TT in a will This simply means that there are assets in starting point for any comprehensive estate While the best approach is to always a person’s estate that are not validly dealt planning exercise to ensure wealth passes “begin with the end in mind” and with under the will. efficiently to the intended recipients and ensure that a person’s estate planning that the transfer takes place at the intended The following summary gives a broad documentation achieves their objectives time. example of the way in which the intestacy (for example, by including a TT), it is rules often work (although as noted the Asset protection strategies and the use possible to establish a trust following position varies in each state). If a person of special purpose trusts are important a person’s death, such as an estate dies leaving: issues to consider in estate planning, proceeds trusts (EPT) or a superannuation their spouse (including a de facto particularly where potential beneficiaries proceeds trust (SPT). spouse), but no children: their spouse are in financially high risk occupations, These “after-death trusts” should be receives everything; such as professional practice, or in considered as an asset protection and tax business, and where there is a risk that a their spouse and children: their spouse planning tool. In certain circumstances, personal relationship of a beneficiary may receives the first $150,000 and one-half they can be used to create a “set and degenerate in the future. of the balance of the estate if there is forget” structure that provides peace one child, or one third of the balance Potential beneficiaries that fall into any of of mind now, while still accommodating if there is more than one child. The these “at risk” categories will be exposed to the needs of evolving family dynamics children share the balance between losing assets, unless appropriate structures in the future. them; are put in place under the estate plan. children but no spouse: their children The difficulty in many estate planning What is an estate proceeds receive a share each, but only once they exercises is that serious attempts to devise trust? turn 18 years of age or get married; and implement a plan are often not made Before looking at how an EPT operates, until some “triggering event” stimulates it is useful to provide an overview of no spouse or children: the person’s action. Australian intestacy law, as these rules are parents will share the estate (if both are alive then equally); and Often the triggering event is itself an relevant to the quantum of the proceeds issue that may jeopardise the ability that will act as the capital fund of the EPT. no spouse, no children and no parents: their siblings share equally. to implement appropriate strategies, If a person dies without a will, the law says for example, financial or matrimonial that their assets will be distributed to their The amount received by each person will misfortune or life-threatening illness. family, as determined by a set formula depend on the value of the estate and 72 TAXATION IN AUSTRALIA | AUGUST 2015 COVER whether any other beneficiaries are entitled ability to split income according to the the EPT, only the income generated to the assets of the deceased. financial circumstances and needs of by that portion of the capital which the willmaker’s children would have If the person does not have any family the deceased’s children. members who qualify, then the assets may Diagram 1 illustrates how EPTs work. received on an intestacy will be entitled to the concessional rates of taxation; pass to the government bono vacantia. The income distributed from the EPT and may be used to pay for the children’s Estate proceeds trust education, living and other expenses. any assets that do not form part A proceeds trust can be either an “estate Any income received by a minor will of the willmaker’s estate (such as proceeds” trust (where the proceeds were be taxed at the normal adult rate, assets owned as joint tenants with originally part of the deceased estate), rather than the penal rate that normally a spouse or insurance policies that or a “non-estate proceeds” trust (where applies to income distributions to infant are owned by the surviving spouse) the proceeds originate from an asset children. will not be able to be contributed to which does not form part of the deceased the EPT. This means that, assuming the children estate). Some common examples of are not earning other income, they will Table 1 provides a brief summary of the non-estate proceeds are those funded be eligible, once rebates are taken into key technical differences between an EPT by superannuation entitlements or life account, for more than $20,000 tax-free and a TT. insurance. for income received by each child each Despite these limitations, an EPT can be An EPT is a trust established by a deed financial year. Any additional income will of particular benefit where no TT has been after the death of the deceased. It is most be taxed at the ordinary adult marginal established and: commonly used to obtain advantageous rates. for families with minor children where income tax treatment for income allocated There are numerous technical issues extra income would be needed to to minor beneficiaries. that must always be reviewed before support the surviving family members Generally, an EPT is more restrictive than establishing an EPT, including: should a parent die; and an ordinary TT established pursuant to the person distributing the assets to the the terms of a will. The key difference where legitimately minimising tax EPT must have received them under between an EPT and a TT is that the minor and having flexibility in relation to tax the will of the deceased; beneficiaries (persons under 18 years of planning is important. age on establishment of the trust) must the transfer of assets into the EPT What is a superannuation be the ultimate capital beneficiaries of the must occur within three years of the trust, meaning the assets of the trust must deceased’s death; proceeds trust? ultimately vest in them. In contrast, there the concessional rates of tax are An SPT is a trust that is established solely is complete flexibility when nominating the very unlikely to be available to the to receive superannuation proceeds on the ultimate capital beneficiaries of a TT. grandchildren of the deceased; death of a fund member. An SPT can be established by a will or by deed after the The main advantage of an EPT is the while assets in excess of what the death of an individual. concessional tax treatment of income willmaker’s children might have received distributed from the trust and the on an intestacy can be contributed to Before considering the issues relating to establishing a post-death SPT, it is relevant to consider the operation of an Diagram 1 appropriately crafted SPT in a will and the taxation and asset protection benefits it Property affords. Gift into EPT Deceased Settlor/adult beneficiary SPT established in a will The Income Tax Assessment Act 1997 (Cth) (ITAA97) provides that a superannuation death benefit, paid to a death benefit dependant as a lump sum, is not assessable income. A death benefit dependant is defined as:2 EPT a spouse or former spouse of the deceased; a child, aged below 18, of the deceased; – Establish within three years a person with whom the deceased had of death. an “interdependency relationship”;3 and – Holds the sum the beneficiaries a person financially dependent on the would have inherited under Minor beneficiaries intestacy law. deceased just before they died.