2020 Testamentary Trusts and a year that was unprecedented

As we all contemplate the year that was 2020 and our thoughts turn to Christmas with our family members, it is a good time to reflect on where we are at in terms of our succession plans.

There have been many changes this year brought on by the Covid 19 pandemic which has caused us to look at life from a different perspective. Life is not always about getting the next payment, the next job or the faster car. It has enabled us to reflect on what we find most important, what we truly cherish and how we want to live the life we have. There has never been a better time to contemplate what we will leave behind for those loved ones and how we prepare for an easier transition.

This year there has been a number of key changes in succession law. The most striking example has been the Duties Act NSW, which deems discretionary trusts, including testamentary trusts, to be a “foreign” trust, by having the mere power to distribute to a person that is defined as foreign.

Effective from 24 June 2020, all trusts will be subject to a higher surcharge for land tax and duties including penalties and interest, for failing to notify the commissioner of revenue. This covers any purchases of residential land in NSW and land tax to foreign persons who own land in NSW. The trust may be liable for the surcharge and higher duty if “any one of the potential beneficiaries” is a foreign person. Each beneficiary is deemed to have the maximum percentage interest in the income of the income or  property over which the trustee may exercise a discretion to distribute. [see 104JA Duties Act 1997 and section 5D Land Tax Act 1956]

The ruling issued 1 July 2020 changed the way a trust is viewed and defined in that potential beneficiaries are not limited to those individuals named in the trust deed. It also extends to the members of any class of people to whom distributions can be potentially made under the discretion powers of the trustee.

A person is a “potential beneficiary” of  a trust if the exercise or failure to exercise a discretion under the terms of a trust deed could result in any property of the trust being distributed to or applied for the benefit of a person.

To avoid the trust being deemed to be a “foreign trust” the trust deed must meet two conditions:

1. No potential beneficiary of the trust is a foreign person (“no foreign person”) and;
2. The terms of the trust must not be capable of amendment in a manner that result in a foreign person being a potential beneficiary (“no amendment”)

The transition period ends on 31 December 2020, so if you are the trustee of a trust that is capable of distributing to a foreign person (including foreign company or trust) then these provisions will apply.

The simple response is to prepare and sign a Deed of Variation of the trust to confirm that the powers of the trustee exclude distribution to a foreign person as defined and that such variation is irrevocable.

Consider the examples they state. Mr & Mrs Jones both Australian citizens are primary beneficiaries of the Jones Family Trust. Other beneficiaries include their two children Mark and Peter who are under the age of 10. The trust has potential beneficiaries who include future spouses and children of Mark and Peter and no other potential beneficiaries.

The trust has no existing foreign beneficiaries, but future spouses and children of Mark and Peter could be foreign persons. The trustee is taken to be a foreign person. To be exempt from stamp duty surcharges on purchase and land tax each year on owning property in NSW, the trust must be amended to exclude any foreign beneficiaries and the amendment must be irrevocable.

Many of our clients buy residential property in their trusts in NSW whether it is a standard discretionary trust or one which was established by a Will (a testamentary trust).

Note this situation also applies to property owned by trusts in Victoria and is under consideration for changes in Queensland.

We recommend having someone read the trust carefully, identify any land owned or being purchased by the trust and to make a Deed of Variation as soon as possible before the transition period ends.

Given the strength of property investment at the present time it is a very important review to undertake and should be part of the trustees practical steps in administration of the trust.

Call us now if you need a review and Deed of Variation to be completed.