Tara (00:51):
Thank you so much for tuning in. It is your host, Tara Lucke here, and today I want to talk about the topic of post death testamentary trusts, also referred to as estate proceeds, trusts, sometimes post death super proceeds, trusts, and I want to tackle the misconception that can be out there at times that you don't need a testamentary trust in your will because we always have the backup plan of setting up a post death testamentary trust.
(01:23):
Now I'm going to spoil the ending post death testamentary trusts are not a viable backup plan. They are only a solution in a very narrow range of factual circumstances. And even if you can get a post death testamentary trust established with assets inside of it, it is a far inferior solution compared to a testamentary trust established in the will. And it's all of this which drives the approach that I take to testamentary trust and why I'm so passionate about testamentary trust being included as an option in a client's will. Because the reality is we only get one chance to use and create a testamentary trust. It must be in the test data's will before they die to get our full service high value testamentary trust solution. So it's all well and good for me to say that, but I thought in this episode I'll actually step you through how it all works.
(02:37):
So what a post death testamentary trust is, when it might be suitable, how it works and the challenges that we have with them. So a post death testamentary trust is what it says on the box. So you can consider looking into one where your test data has died and they have no will or a basic will that leaves everything to a single person. Usually we do look at setting them up where there's a basic will for a couple and the deceased spouse leaves everything to the surviving spouse and they've left minor children. So the rule is that you have three years to contribute proceeds of an estate that you have received into a trust. And if you do that, then you can receive accepted trust income treatment on the income created and generated in that trust. But there's a whole heap of KV eights around that.
(03:49):
So firstly it must be, let's start with an estate proceeds trust. So it must be estate proceeds, so you must be able to trace it through the administration of the estate from the deceased person to you as the beneficiary under the will. And then those are the assets that you contribute the trust. It does not include assets that bypass the estate. So anything owned as joint tenants, which just goes by survivorship assets that are owned in structures like trusts or companies. Secondly, the amount that you can claim the tax-free accepted trust income treatment for is limited. There's a cap on it. Now, if you are thinking, I just need a refresher on how those tax-free accepted trust income rules work, go check out episode 45 because I go through that in a lot of detail. So the main objective of a post-death testamentary trust is to get the tax-free treatment for minors.
(05:02):
So essentially there is a cap on the amount of income that can be eligible for the tax-free income treatment and that cap is equivalent to the amount that those miners would've received had the test data died in test state. So I am just pausing there because that is a little bit of a mind bender perhaps. So the point is we want miners to be able to receive tax-free income from the inheritance. That's our driving objective of setting up this post death testamentary trust. So we have to look at who those miners are and their relationship to the test data and look at what would they have received had the test data died in test state. So you might be a step ahead of me here going, if we've got a surviving spouse and we're in New South Wales, Victoria or Tasmania minor children receive nothing because a hundred percent of the estate goes to the surviving spouse.
(06:21):
So you would be right in saying we can't actually utilise a post death testamentary trust in the jurisdictions where the surviving spouse receives a hundred percent if there's a surviving spouse. So that's one of our downfalls of an estate proceeds trust altogether. It's not even available in every Australian state. Let's have a look at a state like Western Australia. So at the time of recording this Western Australia, if there is a surviving spouse and two children who survived the testator, then the surviving spouse gets the first 546,000 plus a third of the estate, and then those two children will each receive a third of the estate. So in that very factual scenario of one spouse and two kids, so the amount of the inheritance that can be gifted into the post death testamentary trust and be eligible to receive the accepted trust income is what the children would've received had the test data died in test state so they could each receive a third.
(07:32):
So two thirds of the estate after the 546,000 is set aside is what can be contributed into the post death testamentary trust. So that's the assets passing through the estate and then only that amount is eligible to go into the post death testamentary trust. So it's not like we can even have the full inheritance going in there. So piecing this together, you might have come to the realisation that it's really only where you have an estate that isn't New South Wales, Victoria or Tasmania. And by the way, Queensland is having indications that it might be moving towards a hundred percent of the estate going to the surviving spouse on intestacy two. So watch this space. So it won't work in a state where a hundred percent goes to the surviving spouse. You need a basic will where the surviving spouse has received a hundred percent of the estate or maybe someone else, but usually it's this surviving spouse who is motivated and you need to have minor children who would've received something on inheritance and would benefit from accepted trust income in this post death testamentary trust.
(08:54):
So it's only a very narrow set of circumstances where a post death testamentary trust is even useful. The other thing I want to mention is the post death testamentary trust is not equal to a testamentary trust. So we know with a testamentary trust established in the will that accepted trust income treatment is available for all of the minor beneficiaries. There's no requirement about them having any connection to the test data. They just need to be named as a beneficiary and be a minor. So that means it extends to nieces, nephews, cousins, all of that extended family. It can include any friends with minor children if they're included as beneficiaries and also multiple generations. So typically we would have children, grandchildren, and so on, all of those lineal descendants. So generation after generation is benefiting from the tax-free treatment of the testamentary trust assets with the post death testamentary trust.
(10:03):
It is only the children who could have received the estate on intestacy who get accepted trust income treatment. So that means one generation, we don't get it for multiple generations. We also don't have trustee discretion. So with a testamentary trust in a will, the entitlements of the beneficiaries are completely at the discretion of the trustee. It does not say anywhere unless we're dealing with a default what the set entitlements of those beneficiaries are. The trustee can distribute zero up to a hundred percent to any beneficiary with the post death testamentary trust. There is no discretion at least on capital. I mean it's sort of unclear, but definitely for capital, the beneficiaries who would've been entitled to the estate on intestacy must receive the capital of the trust in the proportions of their in intestate entitlement. They died in test to sea. So there's no discretion around the capital.
(11:11):
The beneficiaries have to be absolutely entitled to the capital at those proportions, which again, you might be connecting the dots. When we don't have trustee discretion on all of the assets, we lose asset protection benefits because we have certainty that those particular beneficiaries are going to receive that amount of capital eventually. So it looks and feels like their assets and it is something that a creditor or a spouse can point to and say, I know with certainty that that person is entitled to that part of their asset. So really we don't really get a lot of asset protection from a post death testamentary trust. It's a purely tax driven strategy. So we know if you've listened to this podcast before that one of the amazing benefits of a testamentary trust established in the will is asset protection. Now, I'll just put in my standard disclaimer.
(12:18):
I'm being a bit lazy with my terminology When I say testamentary trust established in the will, I mean a testamentary discretionary trust where the entitlements of the beneficiaries are completely at the discretion of the trustees. So we don't have that with the post death or estate proceeds trust. The other thing to factor in is when we are distributing assets from a deceased person to the legal personal representative and then into a testamentary discretionary trust established in the will, we've got deceased estate, CGT and stamp duty exemptions all the way through so we can get those assets from the test data's name into the testamentary trust without tax or stamp duty. However, there is no deceased estate CDT or stamp duty exemption to get the assets into a post death testamentary trust. So if the inheritance is something like real property or anything else shares anything that has latent capital gains or stamp duty consequences in there, then you are potentially looking at transactional costs to even get the assets into the testamentary trust when it's set up post death.
(13:38):
So looking at our narrow range of circumstances to utilise a post death testamentary trust just recapping, it's got to be a jurisdiction where children are entitled to some of the inheritance on intestacy. Even if there's a surviving spouse, the assets can't have capital gains tax or stamp duty consequences on their transfer. And the amount that can be contributed is capped at the amount that those minor children would have received had the testator died in test state. So if you've got a larger state mainly made up of cash where you have a individual who's died leaving a spouse and young kids, you might get some benefit from this post death trust, but it's far inferior to a testamentary discretionary trust that had been included in the will, particularly because we don't get the benefits for multiple generations. There's no intergenerational benefit. We don't get asset protection either.
(14:45):
Now, there is also the requirement which is usually okay to satisfy provided the receive advice promptly, that this is all done within three years of the test aid's death. So I've been talking mostly about the estate proceeds where there's a spouse. I do want to clarify, some people get confused, and this is a really confusing topic, and if you've been confused in the past or you're still a bit confused, that's completely fine because it is hard to wrap your head around. I just want to contrast the situation where we don't have a spouse, so our test data has died leaving minor children and there's either intestacy or a simple or basic will where the children just get their share. That can sometimes be considered a post death testamentary trust, but it's not really the same type of thing. If you actually have a look at our episode about minus trusts, that will probably be a good point to go back and listen to that.
(15:53):
So episode 60 about what happens in that scenario for our bear or fixed trust. So can you actually draught a deed to document the terms attaching to the inheritance where you just had a basic will with a bear trust? I think that's probably the question we're asking. And the same sort of this is where this topic ties into the post death testamentary trust because you do have to draught a deed. So I would just say under both of those trust deeds, you have to be really careful when you're drafting them and look at making sure that the minor children are absolutely entitled to the capital. They should also be entitled really to the income. Sometimes in a post death T trust where there's a spouse, you might have the spouse as an income beneficiary, but the children must be the only capital beneficiaries. We just don't want to have any argument that the trustee has breached their duties or taken the inheritance away from the beneficiaries who are the children.
(17:05):
So you want to be really careful that once those miners reach majority, that they are allowed to take over control of the trust. So I would have to be careful now in Queensland about nominating minors as trustees upon them attaining majority under the trust act that is coming. But you could at least do that for the appointor role. And also just be really careful about, I wouldn't include these super expansive powers about conflicts of interest and loans to beneficiaries or even include an expansive beneficiary classes. I think you have to take a very conservative view when drafting the terms of the trust, both a post death testamentary trust where there's a surviving spouse gifting the assets into the trust and also where the will just leaves assets directly to minor beneficiaries. And we then have to document the terms of the trust for their inheritance.
(18:08):
So actually I'll just mention in case I haven't made it clear, the exact mechanism with our post death testamentary trust is imagine our timeline, our test data has died. So the deceased, the assets are then transferred to the legal personal representatives. So the executor of the estate, they then administer the basic will as you normally would. So the basic will would gift everything to the surviving spouse. So then the asset or the estate assets are transferred from the executor to the surviving spouse, and then the post death testamentary trust is established and the surviving spouse then gives the amount that they can up to that intestacy rule cap into the post death testamentary trust bank account, which is held in the name of the trustee. So it's usually common for the surviving spouse to be the executor and also the trustee of the post death testamentary trust.
(19:17):
But that's sort of like the flow of transactions, and we would be documenting all of that with our appropriate resolutions and having the flow of funds to follow that, particularly with accepted trust income treatment, it's really important to have the tracing of the assets. So there's a clear flow of funds to show that the assets in that trust were what was held by the deceased. Okay, so that's a post death testamentary trust for estate proceeds, and I hope I am giving the impression that they're difficult to manage. There's very strict rules around them and they really don't stack up in terms of asset protection, income streaming intergenerational wealth and flexibility for the family, like a testamentary trust set up in the will. That's why we often say, if you are in doubt, put it in the will. We can always bypass the testamentary trust if we need to go have a listen to episode 51 about bypassing a testamentary trust.
(20:30):
But if you needed the testamentary trust and with hindsight you wish you had included it in the will, but you didn't, you really are stuck, you might fall within this very narrow range of factual circumstances and then this is like a bandaid fix, but even then, it's so inferior. It is the poor cousin to the testamentary discretionary trust set up in the will.
(20:55):
You can also set up a post death testamentary trust for superannuation and life insurance benefits. If we think about it in the superannuation context, there are some challenges that we need to address. It's a little bit people do them. I have done them in the past, but it's a little bit more sketchy than using it for estate proceeds Trust. And yes, sketchy is my technical legal term. So the problem with the super proceeds trust is that there's actually an issue with getting the funds into the trust.
(22:35):
So it's the same kind of concept, exactly the same concepts for the estate proceeds trusts, but you've got to think about our superannuation 101 principles and who can the trustee of a superfund actually pay death benefits and insurance proceeds to. So if you go back to section 62 of the CIS Act, the trustee of the fund can only pay the superannuation to assist dependent or the legal personal representative of the deceased member. So SIS dependent is like spouses child financial dependent or interdependent person, right? It does not include the trustee of a post death testamentary trust. So if you've got a self-managed super fund, potentially the surviving spouse can as controller of that fund just pay the death benefit into the trustee of the post death super proceeds trust account and maybe overlook this discrepancy. But if you have an industry fund where the super proceeds are held and you are trying to do this strategy, you very well may face a challenge where they are saying, we're not going to pay it directly from the super fund to the bank account for the super proceeds trust.
(24:01):
We're not satisfying section 62. So then they might actually pay it to a death benefit to penant or the legal personal representative, and then they've got to get it into the super proceeds trust breaking that nexus with the super death benefits. So it is challenging. There have been some rulings where the ATO has acknowledged that the vibe of it is okay, I'm looking at a ruling now. This is actually from 2014 date of advice April, 2016 concerning something I think the deceased perhaps died in 2014. I was looking for this private ruling number on the private ruling directory, and I couldn't even find it because it had been archived. But if you search archive content, you can find it. So if you want to read it, the private ruling authorization number is 1 0 1 2 9 9 4 9 6 3 3 7 4. And in this, interestingly, the ATO says in their private ruling, in the case of the superannuation, if a strict literal interpretation were applied, the answer to the question of whether we can do this would be no.
(25:22):
But then they sort of go on to explain the idea is the amount being transferred into the super proceeds trust is an amount that directly resulted from the death of a person out of a provident benefit superannuation or retirement fund. And the vibe is that even though there is a disconnect where a spouse has received it from the super fund and is then contributing it into the super proceeds trust, okay, so my sort of comment on that would be you might want to get a private ruling before you do it for your circumstances if you're dealing with super proceeds because it is unclear. The technical interpretation is no, you might be stuck with a superfund who won't pay it directly to the super proceeds trust. And we haven't got any public guidance from the ATO on this to my knowledge. I'm happy to stand corrected.
(26:22):
It's been a while since I've researched this really fully and had to give advice on it for a client. So if you know more than me, please do let me know and we can update it. But at the moment, it does feel like a really big grey area, which again, just sort of goes to show why it's so much simpler and best practise to just set up the testamentary trust in the will. In fact, when I am talking to clients, I'd basically be saying, you have to have the testamentary trust provisions in the will or else you miss out because there's just such narrow circumstances when the post death testamentary trusts work. And I don't want there to be any misconception that the post death testamentary trust is a safety net we can rely on. I hope this episode has been helpful. It is a bit dense and heavy.
(27:17):
The main takeaway for this episode is that post death testamentary trusts are rarely a viable alternative. Even if your family scenario fits in the narrow factual circumstances where they do work, they are inferior on every single level and should not be relied upon as a backup plan. Just include the testamentary trust in the will. If in doubt, include it. You can always bypass it, but you cannot reverse engineer a testamentary trust in the will if you need it. Thank you so much for listening, and I will see you next week.
