Terms to discuss with a solicitor regarding your Will

May 17, 2013
by argentis  |   in News  |   0 Comment

There are significant benefits in having a Will which effectively gives a beneficiary the option to have some or all of his/her share of the deceased’s assets inherited by a testamentary trust. The beneficiary would control the trust.

The testamentary trust gives the beneficiary:

  • Income tax advantages
  • Protection benefits

A testamentary trust is generally a discretionary trust.

It will usually have similar clauses to a normal family trust.

Although it is up to a lawyer to decide what clauses should appear in a testamentary trust, it is suggested that a testamentary trust contain the following terms:

Special Provisions

Superannuation

A testamentary trust can only inherit a superannuation death benefit if the trustee of the fund pays

some or all of it to the deceased member’s estate.

As the amount is not being paid to a dependant of the deceased it will be subject to tax.
This is the case unless a specific clause is included in the trust deed of the testamentary trust (within
the Will) which provides that a superannuation death benefit can only be paid to a beneficiary who is a
dependant for tax purposes. The clause would provide that upon the death of the last “dependant” the
balance of the superannuation death benefit must be paid to that person’s estate. This clause will
ensure that the superannuation death benefit is tax free.

The clause should state that any income and capital gains derived from the investment of that money
by the testamentary trust can be allocated to any beneficiary of the trust.
The clause should also provide that if the deceased was not survived by a dependant then the clause
would have no effect.

In our opinion this would make superannuation death benefit tax free.

Vesting of trust upon death of spouse

If a testamentary trust is set up in favour of the surviving spouse then a problem arises upon the death of that spouse. The children will jointly assume control of the trust. This can cause tension and problems between them.

How can one overcome this problem?

There are three possible ways of overcoming this problem:

  • Set up multiple trusts upon the death of one of the clients. The surviving spouse would control each of the trusts. Upon the death of the surviving spouse control of each trust would pass to one of the children. The problem with this method is that it is only effective for high net worth clients – otherwise the administrative costs and time could outweigh the benefits. The other problem is that the value of the assets of each of the trusts at the date of death of the spouse may not be the same. That is, the children are not being treated equally unless a special balancing clause was included in the will.
  • Upon the death of the surviving spouse the testamentary trust controlled by that person would automatically come to an end. The assets would be allocated to that person’s estate. The assets would then, pursuant to that person’s Will, be divided between the children and, at their election, inherited by each of their testamentary trusts. A CGT liability will arise as a result of the collapse of the testamentary trust. This liability will fall on the deceased’s estate unless the Executor made one of the low taxed beneficiaries presently entitled to that income (eg one or more of the young children/grandchildren). The CGT liability will be low because 50% of the capital gain will be tax free (provided the assets have been held for at least 12 months) and the Executor can elect to either accumulate or distribute the taxable part of the capital gain. The Executor can do this in such a way as to ensure that the least amount of tax is paid.
  • Include a clause within the testamentary trust allowing for the subdivision of the assets of the trust into separate sub-trusts. Each sub-trust would be controlled by one of the children.

We generally recommend the automatic vesting of the trust controlled by the surviving spouse upon that spouse’s death.

Standard provisions

Other clauses that should appear within a testamentary trust:

  • The trust deed should nominate an appointor. This person has the power to replace the trustee. This person is the effective controller of the trust.

Upon the death of the appointor the deed should provide for a new appointor to be chosen (except in the case where the appointor is the surviving spouse and the deed provides that the trust will automatically come to an end upon the death of the spouse).

We generally recommend that the deed provide that the person nominated either by deed or Will by the former appointor shall take that person’s place upon that person’s death. If no nomination has been made then the children of that person shall jointly become the new appointors. If the person is not survived by any children then the residuary beneficiaries of that person’s estate shall become the joint appointors.

  • Beneficiaries. The trust deed should broadly define beneficiaries. Beneficiaries should include the controller of the trust, that person’s spouse, that person’s children and grandchildren, that person’s relatives, any company of which that person is a shareholder, any trust of which that person is a beneficiary and any charity.
  • The trust deed should give the trustee a broad discretion as to the allocation of income (including different types of income) and capital.
  • The trust deed should give the trustee broad investment powers.
  • The trust deed should allow the trustee to vest (i.e. bring the trust to an end) the trust at any time.
  • The trust deed should automatically provide that if the trustee becomes bankrupt then the trustee willbe replaced by the Executors.