Australian Will trusts
There are distinct advantages to establishing a trust for your beneficiaries in the terms of your Will, including asset protection from Family Law proceedings and tax minimization. (a testamentary trust”)
If your spouse or a child inherits through your Will, their trust can be created in a way that protects the asset from bankruptcy, disability and matrimonial property claims. The terms of the trust are critical to how the estate assets can be protected, invested and distributed to a class of beneficiaries within a family group. The trust only begins when you die and is put into effect once the assets are distributed through your estate. It involves establishing a separate account in the name of the person nominated acting “as trustee” for the estate trust, which means they “control” the assets but do not “own” it as such. If there is a problem by bankruptcy or divorce, the terms of trust can dictate they become “ineligible” to act and by default can appoint the Executor or another family member. They then control the trust until the legal issues are resolved.
Discretionary, fixed and special disability Trusts
These trusts can be structured to take account of different circumstances of a beneficiary such as disability or issues such as mental health. The trusts can be totally up to the choice of the person (a fully discretionary trust) or they can be partly fixed as to the level of income or capital (a fixed trust). The access to the capital of the trust can be subject to an age limit or staggered over a longer period of time (a conditional access trust). As unique as your family situation may be, a number of different trusts can be established to suit the needs of everyone. If you have a disabled child, a type of protected trust can be created to ensure all health care assistance and Government support are able to continue for that person. (a special disability trust).
A major benefit of establishing a trust in your Will, is the distributions of income or capital gains, are taxable at adult marginal rates, even though a child or grandchild is under 18 years of age. The income each year for the life of the trust (which can be up to 80 years duration) can be more widely spread throughout all family members even though they may be only children and the entire tax payable can be minimiz
Photo by Anna Shvets on Pexels.com
ed. You do not need to be wealthy for this to have a very significant tax benefit over time and to enable the additional savings to be accumulated and invested through the trust to provide additional growth of the assets. Tax and financial advice should be obtained to ensure the circumstances are suitable and the trust terms drafted appropriately.
You are able to transfer assets “in specie” or in kind, directly into a trust, such as an investment property or directly held shares. This can also be very beneficial if the asset was acquired prior to September 1985 and as such is a pre-capital gains tax asset. Preserving this status is significant and will provide greater benefit to your family.
The best outcomes are achieved by careful planning and making sure the drafting of the Will, including estate trusts are tailored to suit your individual circumstances. This a conversation best conducted between the accountant, financial planner and your legal advisor.
Consider carefully if any of your chosen beneficiaries are living overseas and are no longer Australian resident taxpayers. The advantages are there for asset protection, but the tax implications will be different. If they buy property in the name of the trust in Australia the tax issues that arise for a foreign resident must be looked at closely. Additional stamp duty and land tax will be applied and are payable by the trustee of a foreign based trust.
Due to these additional taxes many estates have been affected according to the laws that apply to a foreign ownership of property. Technically Wills creating trusts for foreign beneficiaries are affected and some concern has been raised about existing drafting of these documents.
A new Bill introduced in New South Wales gives some relief for trustees of discretionary Will trusts, which, may have triggered potential duty, to clearly exclude all foreign potential beneficiaries, or risk higher land tax charges. These are amendments to the Duties Act 1997 and the Land Tax Management Act 1956 . The changes would deem a trustee of an Australian discretionary trust to be a foreign person, unless the terms of the trust specifically excludes foreign persons The effect would be to trigger an extra 2 per cent land tax charge from the 2018 land tax year onwards, plus transfer duty of up to 15 per cent on any residential land purchased.
The implication was that all discretionary trust deeds, including Wills, would have to be amended to satisfy the ‘no foreign beneficiary’ requirement by midnight on 31 December 2019. The government later delayed this deadline.
The particular difficulty facing practitioners was in amending testamentary trusts. Although cases where the testator had already died were not caught by the proposed legislation, still-living clients with existing wills incorporating trusts were in danger of being caught. The 2019 Bill would thus give estate planners the huge task of identifying which living clients had Wills incorporating testamentary discretionary trusts, contacting those clients and then persuading them of the importance of amending their wills to exclude foreign beneficiaries.
However, The State Revenue Further Amendment Bill 2020 (NSW), now awaiting a start date, exempts the trustee of an Australian testamentary trust from being deemed a foreign trustee if the trust arose from a Will executed on or before 31 December 2020.
Exemptions from the deemed-foreign rule are also granted for an intestate estate (where there is no Will ) where the deceased died before, or within two years after, the commencement of the Act , and some other circumstances. The 31 December 2020 deadline also applies to inter vivos trusts. (trusts created during your lifetime). These new timelines should give practitioners and their clients sufficient time to act to avoid being caught out, but all new trusts in Wills should take account of these laws.
Ask us how we can tailor a Will including trusts for your family specific to your circumstances.
We are able to meet by web conference and you can start your Will on-line via our website www.perspectivelaw.com