Testamentary Trusts
Author:
Peter Gell
Publish Date: November 3, 2006
Testamentary trusts are simply trust created under the terms of a persons Will. The trusts are now largely tax driven. This arises from the provisions from section 102(AG) ITAA 1936. This section in subsection 2 creates a concept of accepted trust income. It enables income from a trust estate to be diverted to persons normally under a legal disability such as minors without attracting a penal rate of tax. The minors are taxed at adult rates. If income where to be distributed to a minor under the terms of a normal discretionary trust for example the income is taxed at a penal rate.
Testamentary Trusts can take many forms. They can take the form of beneficiary testamentary trusts, that is, a particular trust set up for one beneficiary, a Testamentary Trust set up for all of the beneficiaries, a capital protected trust, life interest trusts, fixed protective trusts, fixed income streamed trusts – the variations are endless.
It is possible to “feed” a Testamentary Trust by placing income producing assets in it – the trustee for the estate of the late A W Furse 5 Will Trust.
A Testamentary Trust is subject to the operation of ordinary general law and taxation laws. Where the trustee of a Testamentary Trust has the discretion to distribute the different types of income to different beneficiaries that is stream income. It can do so to ensure maximum tax effectiveness of the income distributions – for example beneficiaries may have capital losses in which event capital gains can be distributed to those capital losses to off set. A particular note has to be made in relation to death and superannuation.
Section 101(A)(3) of ITAA 1936 provides an effect where in the year of an income an amount is included in the assessable income of the deceased tax payer and respect of an eligible termination payment that amount is included in the assessable income of that year of income of the trust estate and shall be deemed to be income to which no beneficiary is presently entitled.
Section 27AAA of the ITAA 1936 however allows the commissioner to trace an interest in the superannuation death benefit through the deceased estate to the ultimate recipient. In effect this says that the amount that would otherwise be an ETP in relation to the deceased tax payer is to be reduced by such amount as the commissioner considers appropriate have regard to the extent to which dependants of the deceased (widely defined) may be reasonably be expected to benefit from the estate. The effect of this is that the relevant amount falls outside the definition of an ETP and is received free of tax.
Where the commissioner can observe that a Superannuation Death benefit can be traced through a deceased estate to a spouse, ex-spouse, child under the age of 18 or a person with whom the deceased member had an interdependency relationship section 27AA will operate to secure a tax free benefit to those persons.
It is important therefore in Wills to create a separate superannuation proceeds trust in the event that the death benefit is paid into the estate. The beneficiaries of that trust are defined as dependants. A lump sum can be paid into the estate and invested via the Superannuation Proceeds Trust. If the income is split to legally disabled persons it can be taxed at adult rates and not at the penal rates under division 6AA ITAA 1936.
If the lump sum is received outside of the estate and then say invested by say the wife she is unable to distribute investment income earned from the lump sum to the children without the children being taxed at penal rates. This is because the proceeds of the investment have not been received via a trust contained within the Will and therefore do not satisfy section 102 AG ITAA 1936.
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