trusts

Discretionary trusts – What happens to the assets held on death?

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Discretionary trusts are an incredibly valuable tool for structuring the affairs of your business, investments and family finances. These trusts allow the trustee to split the income of the trust assets between a family group. This has significant tax advantages as the trustee can vary the amount of income paid to a beneficiary in light of that beneficiary’s other income.

It is important to consider what will happen to the assets held under a discretionary trust when you pass away. After all, you are unable to directly bequeath these assets through your Will. This is because a trust is a separate legal entity. Under a trust structure, the assets are owned by the trustee of the trust and do not automatically form part of your estate.

However, the trust can be structured in a way that preserves its longevity after you pass away. This can be considered through a holistic estate planning process.

One such strategy involves drafting your trust to include a clause which stipulates who will become the appointor or “controller” of the trust should you die or become incapable of performing this role. The role of an appointor is highly important, as this person has the power to appoint and remove trustees. They have the power to decide if any changes are made to the trust. The Appointor can nominate in writing or by a Will a trusted replacement Appointor to oversee the function of the trustee.

If you are the trustee of your own trust, a second option might be to draft the trust to stipulate who will replace you as the trustee by default when you pass away.

Alternatively, if the trust is managed by a corporate trustee, you can also nominate who will be the director or shareholder of the trust. This can be done through your Will, by company resolution, or through a Business Succession Agreement. By nominating a trusted replacement trustee, you can be confident that the trust will be efficiently managed when you pass away.

During the estate administration process, it is also important to check the balance sheets of the trust to determine whether there are any unpaid present entitlements or loan accounts owed from the trust to the deceased. This can be paid out by the trust to the deceased’s estate and is payable on demand by the executor as a debt due and owing.  The alternative is to forgive these loans so that the capital remains held by the trustee of the trust to the amount of the loan.

Through these strategies, you can ensure that your family members continue to benefit from the advantages of the discretionary trust continue once you pass away. At Perspective Law, we approach the estate planning process as a holistic strategy which addresses all aspects of your legal affairs. For further information, please do not hesitate to call our office on (07) 3839 7555.

Testamentary discretionary trusts – are they right for me?

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How to create your strategic plan

Of course things quickly get complicated when you have established a multitude of companies and trusts to minimise tax and manage risk. Here are a few key points when thinking through the entire estate planning exercise:

1. Is there enough in the share of the estate to make it worthwhile to establish a trust? If the share of the estate is small perhaps for ease of administration a trust does not need to be set up. Consider if there are any tangible financial benefits or tax reduction options that suit.

2. Does the estate trust need to be commenced or can the person just dispense with it? In some cases it is more appropriate to just distribute the share of the estate but you need to confirm the power to do this if that is intended.

3. What is the real intention behind the trust? Is it to protect the asset from divorces, insolvency or a spendthrift family member? Often the prime motivation to establish a trust is to ensure people are protected from their own circumstances, such as a tenuous relationship, risk in business from creditors or their own vulnerability.

4. What kind of trust is appropriate for each beneficiary? Should there be an independent trustee holding control of the trust and assets? Should siblings jointly control each of their trusts? What are the practical implications of investing the assets over a long period and to suit each family group? These are important questions and not one size fits all.

5. What is a beneficiary is disabled or unable to manage their financial affairs? A special disability trust can be established in the Will and it will preserve the Centrelink pension entitlements if the person is assessed at a level of disability that complies. A main residence can be gifted into these trusts for the long term accommodation of the person even if they share with others with the support of  a carer. Careful drafting is required to ensure the model rules for the trust are created.

6 . What powers do the trustee have over the trust and who can they appoint to replace them as trustee? Often the cascading effect of  the estate trust is intended so that the capital is preserved and invested at least until the third generation has been appointed at a set age to act as trustee. There can be a requirement the trust must continue until certain specified beneficiaries reach that prescribed age as the will maker decides.

7. What powers should the trustee have? Can they invest in shares, real estate, a main residence, managed funds, exchange traded funds and can they borrow money against the capital of the trust? It is important to define the rights of the trustee so when managing investment accounts they have either the freedom or the restriction to deal with these assets.

8. What effect do the New tax Rules have? Section 102AG(2AA) was introduced to the ITAA starting July 2020. This imposed a new test income is not excepted income if it is generated from assets:

  1. acquired by or transferred to the trustee of the trust on or after 1 July 2019, and
  2. are unrelated to property of the deceased estate.

For example, if the deceased leaves $100,000 in a testamentary trust, this is excepted income as it formed part of the deceased estate. If this amount is invested, any return on the investment is also excepted income. However, if the trustee borrows $100,000 from a lender and injects it into the trust, this amount and any return is not excepted income. The borrowed funds have no connection to the deceased assets, so it does not satisfy the test under section 102AG(2AA).

The most important step is to take the time to get strategic advice for your individual estate plan. It is so easy to spend an hour by web conference talking to an experienced estate lawyer, who can have a detailed conversation with you and your accountant and financial advisor. Create the plan you need.