How to set up a Testamentary Trust after death

by Leigh Adams Lawyers

Wills using testamentary trusts are the starting point for most estate planning endeavours. They can ensure that wealth will pass to the intended beneficiaries in the right amount at the right time.

Testamentary trusts are also relevant when implementing a strategy to protect assets. As estate planning lawyers at North Sydney, we recommend that the will-maker incorporate a testamentary trust wherever relevant.

The problem is that all too frequently a serious attempt to put together a good estate plan is not made until financial misfortune or life-threatening illness strikes. By then, the options available are all too few. What can be done to implement a trust structure after death?

If there is no will

As testamentary trust lawyers in Sydney, we can tell you that the intestacy laws provide that if you don’t have a will than your estate goes to your spouse (including de-facto) if there are no children; if you have a spouse and one child, then $150,000 goes to your spouse with the rest being split between your spouse and your child equally. Your spouse gets one third of the rest if there is more than 1 child and in that case, the children share the balance equally between them.

If you have no surviving spouse and have children, the children receive between themselves an equal share once they turn 18.  If you have no spouse and no children, then your parents get your estate (equally between them).  If you have no parents, then it goes to your siblings equally.

The above arrangements obviously do not suit everyone.

Estate Proceeds trust

We can fix the problem of not having a will by establishing an estate proceeds trust after the death of the deceased. It is a great way to get advantageous income tax treatment for income allocated to minor beneficiaries.

One limitation on estate proceeds trusts is that the persons who are under 18 at the time it is set up must be the people who receive the trust assets when the trust comes to an end. In addition, estate proceeds trust must be set up within 3 years of the date of death.

We can draft the estate proceeds trust so that concessional tax treatment of income distributed from the trust is available and so that trust income is split between the beneficiaries depending on the financial circumstances and needs of the children of the deceased.

Income received by a child will be taxed at the adult rate and not at the penal rate that usually applies to the usual trust distributions to infant children.

This means that, after rebates are taken into account, each child can receive more than $20,000 tax free income in each financial year. This money can be used to pay for the child’s education, living and other expenses.

In addition, assets in excess of what the will-maker’s children might have received on an intestacy can be contributed to the estate proceeds trust - although income generated from these additional assets will not receive concessional rates of tax.

Superannuation Proceeds Trusts

These are usually set up in a will to capture a superannuation death benefit where the beneficiary is the legal personal representative of the deceased.

If there are surviving death benefit dependants (for example, a spouse or former spouse, children under 18 years, someone “interdependent” with the deceased or someone “financially dependent” on the deceased), than by using a superannuation proceeds trust, a tax free distribution of the superannuation proceeds can be achieved providing the nominated death benefit dependants receive the capital of the trust when it ends.

Post Death Superannuation Proceeds Trust

This style of superannuation proceeds trust is said to be very helpful to surviving spouses with infant children.

Take Jean who died suddenly of a heart attack leaving Jeanette and their three children Tom, Dick and Harry aged, 4, 7 and 9 years. He had $1m in his self-managed super fund.

His binding death benefit nomination left it all to Jeanette. She kept $300,000 and wanted to put the remaining $700,000 into a post death superannuation proceeds trust. As Sydney superannuation proceeds trust lawyers, we were able to advise her about this.

Jeanette said that she could control the trust. She had read somewhere that income and capital distribution to the infant children could be used to pay for food, holidays, school fees and clothing and accommodation.

After rebates are taken into account each year, Jeanette said she could distribute over $20,000 to each of Tom, Dick and Harry (ie over $60,000) tax free under the ‘excepted trust income rules’ of the Income Tax Assessment Act 1936.

What is wrong with a post death Superannuation Proceeds trust?

Lots. Firstly, it is possible that the superannuation fund trustee might not have discretion to pay proceeds to a superannuation proceeds trust either under their trust deed or indeed at law.

If the money does not pass directly from the superannuation fund into the superannuation proceeds trust then there is a real risk that the ATO will rely on section 102AG of the Income Tax Assessment Act 1936 and not allow access to the “excepted trust income provisions”. This problem does not arise if the superannuation proceeds trust is established within the will.

What did Jeanette do?

Leigh Adams Business Lawyers established a post-death estate proceeds trust with the money Jeanette received tax free from Jean’s superannuation entitlement. The trust was very helpful for Jeanette as she ran her own business and the transfer of Jean’s superannuation entitlements into the estate proceeds trust enabled a legitimate way for Jeanette to protect her inheritance from creditors should Jeanette’s business fail at any time in the future.

Where families have children under 18 years and extra income will be needed to support the family member should a parent die or where it is important for a family to legitimately want to minimise tax and have flexibility in relation to tax planning, then see our after death testamentary trust lawyer by calling Leigh Adams Business Lawyers now on 02 99640022 or email . We get you there.



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