Testamentary Discretionary Trusts

Quite often a client will come to us and say they have heard about a Will that provides for a ‘testamentary discretionary trust’ and they want to know if it is necessary and what it means.  This blog answers the seven main questions we are asked about testamentary discretionary trusts.

1. What is a testamentary discretionary trust?

A testamentary discretionary trust is simply a trust which is established in a Will.  The beneficiaries receive their estate distribution on the terms of a trust rather than in their personal name. 

The trustee has the day-to-day control of the trust.  An independent trustee can be appointed or the Primary Beneficiary can be the trustee of their own trust, either on their own or jointly with another person.  

There are two main benefits:

  • Asset protection
    • A beneficiary does not own the assets in a testamentary trust which means that creditors will generally not be able to access the assets of the trust;
    • An independent trustee can be appointed if the assets are at risk, such as through the beneficiary suffering from a gambling problem or drug dependency;
    • The trust can offer protection from a family law breakdown;
    • The trust can be drafted such that a person is deemed ineligible to act as trustee if they are declared bankrupt;
    • To best safeguard assets, a will-maker might consider appointing two trustees and two appointors.
  • Taxation advantages including:
    • Minor beneficiaries are taxed at normal adult rates on excepted trust income rather than at the penalty rates that usually apply to minors.  Income earned on assets forming part of the trust will generally be ‘excepted trust income’;
    • The trust can be used to stream different categories of income to different beneficiaries;
    • Income can be distributed to beneficiaries whose marginal taxation rate is low;
    • The class of beneficiaries can include tax-exempt entities.

The trustee can remain in place for up to 80 years or earlier if the trustee decides to vest the trust.

2. Do I need to set it up now?

The terms of the trust form part of the Will.  However, the testamentary trust only comes into operation after the testator’s death.  After signing the Will no further steps need to be taken until the testator dies.

3. What are the ongoing costs of the trust?

The trust will need a tax file number and tax returns will need to be lodged each financial year.  There can be associated accounting costs.

4. Is my estate large enough to warrant setting up a trust?

Regardless of the size of the estate, the trust still offers asset protection and tax advantages.  As long as the ongoing costs of the trust are not disproportionate to the benefit and your assets form part of your estate (property held as joint tenants and assets held by a family trust for example for not form part of your estate) the trust can be advantageous.

It is also possible to give beneficiaries (once they have reached the preservation age) the option of whether they take their distribution personally or on the terms of the testamentary discretionary trust.

5. Will the trust make it complicated for my Executors?

The trust does not need to be complicated.  At Perspective Law we take the time during the estate planning process to ensure our clients understand the terms of the trust and that it upholds their wishes.  We also assist beneficiaries of deceased estate and can provide guidance in relation to the setting up of the testamentary trust, including referrals to accountants or financial advisers.

Most of our clients feel at ease after completing their estate plan and knowing their Will reflects their wishes and provides tax advantages and asset protection for their beneficiaries.

6. Is the cost of preparing the Will worth it?

The cost of drafting a Will which includes testamentary discretionary trust is more expensive than the cost of a simple Will.  However, the testamentary trust can result in significant tax savings for your beneficiaries.  The asset protection also makes the Will an investment.  If, for example, estate assets are distributed to a beneficiary in their personal name and they have been declared bankrupt, the assets will vest in the bankruptcy trustee.  This alone makes the Will worthwhile.

7. I already have a family trust – can I just use that?

It is possible to name family trusts as a beneficiary of the estate.  However, assets that pass into a testamentary trust are subject to a much lower tax rate.  Entitlement to concessional rates of tax will generally be limited to income from the transferred assets and not from assets subsequently acquired.  This is different to a testamentary trust where all the income of the trust estate can be taxed concessionally.

Other considerations include:

  • The vesting date of the family trust will be sooner than the possible vesting date of any testamentary trust as the trust does not come into operation until the testator’s death;
  • There can be uncertainty around the control of the family trust at the time of death;
  • Alternatively, the family trust can be an eligible beneficiary of a testamentary trust and distributions can be made to the family trust from the testamentary trust.

To discuss further, call Lauren Nolan now or email us at lauren.nolan@perspectivelaw.com

Property Contracts- Correct Purchaser?

In the Queensland property market, solicitors are often an afterthought when it comes to commencing the sale or purchase of a residential property. Unfortunately, by the time “legal” gets subbed into the game, the agent has already scored straight down the middle with the contract signed sealed and ready to be delivered. The result can often be problematic, particularly if you are dealing with a more complex transaction.

An issue that comes up more often, is having the correct name on the contract.  Often, this is due to a fundamental misunderstanding of the process and the importance of having this decision made prior to signing. The liability for stamp duty attaches to the entity from the time the contract is signed (not when the contract goes unconditional, or when it settles). Particularly for buyers, once the contract is in place, varying the purchasing entity can have adverse implications for stamp duty (read here: doubly duty). Should you find yourself in a situation, during the contract, where you advise that the name on the contract needs to be changed as “it was always meant to be purchased in the trust, but the seller said we needed to sign urgently and the trust wasn’t set up yet”, careful consideration is required.  

The most important thing to do in this situation is to act promptly. Depending on how much time has passed since the matters genesis, and the severity of the change required, you may be able to withdraw from the contract under the cooling off period. This carries the risk of the seller requiring a termination penalty so may not be desirable in all circumstances. The most common course of action however,  while the contract is unconditional, will be to make a request with the other side to enter into a deed of rescission. This secures the property, while the correct contract is drawn up and executed by the (correct) parties. 

The problem with this approach is that it relies strictly on mutual agreement between the parties. In a Sellers’ market, this approach is not always successful. If the seller refuses, and the contract is unconditional, the buyers have no choice but to complete the purchase or risk losing their deposit.

How can this issue be avoided you might ask and I offer three words: Review, Collaboration and Education.

First and foremost contract reviews. This is the most obvious route to success as it allows the solicitor to pick up the omission or error before it becomes a problem.

Collaboration, with agents, clients, the accountant and (the other side to the extent permitted by law) to ensure everyone is engaged once the issue arises. Often dealing directly with the agent at the outset to clarify entity with them, goes a long way towards securing a successful outcome. The agent is the indispensable connector, they are the go between for the buyer and seller and often have a better relationship with both parties. They also have a vested interest in a successful outcome.  Collaboration is also important with client and lawyer. Discussing the issues with the purchaser directly so they understand exactly the stamp duty issues as they arise (and before they become disastrous), can often lead to a more thorough, considered and effective solution.

Finally education. Advising the agent early first and foremost is so important. It is usually an agent who will prepare the contract, so giving clarity to an agent as to stating the correct purchaser is critical and helps a long way in preventing a ‘repeat’.  The value of having a solicitor review the contract prior to signing cannot be understated.

Please contact our office today to speak with Katherine Blood on 07 3839 7555 if you wish to discuss your contract or via Katherine.Blood@Perspectivelaw.com

Recovering Land Tax – Points to Consider for Tenants and Landlords

As land tax can be a significant expense for investment property owners, when considering a lease, it will be of interest for both the potential lessor and the tenant whether the land tax can be recovered from the tenant as an outgoing.

The following chart lists a simplified set of questions and outcomes for landlords and tenants to consider when looking at land tax.

A. Residential or Retail Leases

Tenants in a retail shop lease cannot be required to provide land tax by the landlord. While landlord’s outgoings can be recovered in retail shop leases, clause 7(3) of the Retail Shop Leases Act 1994 (Qld), specifies that land tax cannot be included as a recoverable outgoing.

In residential leases, the Lessor must pay all charges, levies, premiums, rates or taxes for the premises, which includes council rates and land taxes, per clause 163 of the Residential Tenancies and Rooming Accommodating Act 2008 (Qld).

B. Leases that commenced between 1 January 1992 to 30 June 2009.

Commercial leases that commenced during the period between 1 January 1992 and 30 June 2009 cannot recover land tax from the tenants, even if there are provisions in the lease that allows for it.

However, per the decision in Vikpro Pty Ltd v Wyuna Court Pty Ltd [2016] QCA 225 in leases that commenced during this period, with land tax arising on or after 30 June 2010 which has: –

  • already been paid by the tenant, then that amount can be retained by the landlord and the tenant cannot seek to recover the land tax already paid; or
  • been ordered by the court to be payable by the tenant, that order can still be enforced.
  • Leases after 30 June 2009

Since the decision in Vikpro Pty Ltd v Wyuna Court Pty Ltd and a legislative change in 2017, landlords in commercial leases that commence after 30 June 2009 will be able to recover land tax arising from 30 June 2010 onwards, as long as the lease permits it.

Potential tenants seeking to enter into a lease requiring contributions of outgoings, including land tax should ensure that they receive sufficient disclosures on the anticipated costs, including by seeking a land tax clearance search.

If you have any questions about a commercial lease and the recovery of land tax, please call us on (07) 3839 7555.

Common Estate Planning Traps to Avoid

As with most estate administration matters, we see clients that are left with difficult circumstances after their parent has passed away. Sometimes, those clients are survived by step parents, who were married to the deceased parent for only a short duration and had no biological children together.

Common issues that arise during the course of these matters, include: the deceased parent failing to leave a valid Will or failing to execute a valid binding death benefit nomination for payment of their superannuation death benefits. The clients are left to deal with these complicated issues, which can lead to disputes and causing legal and accounting fees to be unnecessarily incurred.

Steps can be taken during your lifetime to ensure that your family is safely provided for on your death. Below is a non-exhaustive list of common estate planning traps to avoid.

  1. Marriage (and civil partnership) revokes a Will

A Will is revoked by the marriage of the testator. If a testator enters into a civil partnership, their Will is also revoked.

However, if the Will contains gifts of property to the spouse of the deceased at the date of death (or other dispositions of property), or appoints the spouse as Executor (or as Trustee, Guardian or any other appointment), then the Will is not revoked to that extent. They may be left with the power to distribute assets to themselves which could be unintended.

To avoid this mistake, consider whether a Will should be made in contemplation of marriage. Generally, the solemnisation of the marriage will not revoke the Will.

  1. Divorce or annulment (or end of a civil partnership or de facto relationship) revokes a Will

If a testator’s marriage ends by divorced or is annulled, and their Will contains dispositions of property to the former spouse, or appointments of the former spouse, then these provisions are revoked.  For example, a gift of real property to a former spouse is revoked and the gift takes effect as if the former spouse had died before the testator.

There are some exceptions. For example, appointments of the former spouse as Trustee of property for minor children of their marriage, will not be revoked.

The effect of termination of a civil partnership or the ending of a de facto relationship on a Will, is the same as those effects for divorce or annulment.  

An important tip is to ensure a Divorce Order is obtained from the Family Court. Otherwise the former spouse is still considered a spouse of the testator.  

  1. Death Benefit Nominations

You can provide the Trustee of a Superannuation Fund with a death benefit nomination (which can be binding or non-binding) for payment of your death benefits. The death benefits can be paid to the legal personal representative (i.e. Executor or Administrator) or a dependant or dependants of the member.

The legislation provides a nomination ceases to have effect three years after the day it was first signed by the member. If the nominations lapses, it may be deemed non-binding and the trustee has discretion to pay the death benefits as it sees fit.

If a member struggles to remember to renew their death benefit nomination, consider rolling the funds into a Self-Managed Superannuation Fund, which enables a member to make a non-lapsing and binding nomination (provided the trust deed expressly allows it). Accounting and tax advice should be obtained to consider whether a Self-Managed Superannuation Fund is suitable for individual circumstances.

  1. Tenants in Common and Joint Tenants

When purchasing real or personal property with one or more persons (or entities), you will need to consider the form of ownership.

An important factor to consider is whether to hold property as “tenants in common” or “joint tenants”. Tenants in common hold their interest in the property separately. Their interest is registered on title as a fraction of ownership.

This means that on the death of one of the tenants, their interest in the property forms part of their estate and is distributed in accordance with their Will.

If property is held as joint tenants, then on the death of a joint tenant, their interest vests automatically in the surviving joint tenant. Their interest will not form part of their estate on death. This is not often discussed during a conveyance and can have devastating effects at the time of death.

Holding property as tenants in common can mean that beneficiaries will need to commit to owning property with another person (or entity), which may be a partnership if it is a commercial or residential investment property.

If the circumstances do not allow for those beneficiaries to receive the cash equivalent of the deceased’s interest in that property, they will end up holding the deceased’s share in the property, proportional to their share of the estate.

If you would like to plan your Will and avoid these and other devastating estate planning traps, please do not hesitate to call Tony Crilly or Elizabeth Ulrick on 07 3839 7555 or email us brisbane@perspectivelaw.com.

If you want 24/7 answers, please go to our website and click on the section “Start your estate planning now”.

If you have an estate to discuss, please click on the link “Start your estate administration now”.