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Estate Planning Guide This guide explains a number of the core issues likely to be relevant in rela on to an estate plan. This is designed to allow you to help narrow down some of the broad areas that might be relevant in rela on to implemen ng, or upda ng, an estate plan. Why is estate planning important? An appropriate estate plan ensures wealth is dealt with, a er death, as intended, while minimising the impact of challenges against the arrangements and costs such as stamp duty, tax and administra on expenses. Wills What is a will? A will is a document that enables you (the testator) to direct who is to receive assets from the estate and on what terms, a er your death. A will allows you to appoint who you want as the executor that is the person who will administer the estate following your death. If you have infant children, it is possible to nominate a guardian under the will to ensure that the children are properly cared for by the people you determine best placed to do so. A will can be revoked by making another will, or can be updated throughout your life me. Why do I need a will? A will is generally the most important document any person signs. A er death the terms of a will can only be altered by a court and, unless a court intervenes, the will regulates how the deceased s assets are to be finally dealt with. There are many things to consider as part of your estate plan. Before you proceed with having any estate planning documents produced, you and your loved ones should carefully consider the following ques ons (where applicable): 1. Who should be the executor of my will? 2. Who should be appointed to make financial, personal and medical decisions on my behalf if I lose the capacity to make these decisions myself? 3. If my first named executor or a orney is not able to act, who would I appoint? 4. Other than my immediate family, are there any other individuals or en es I would like to leave part of my estate to? 5. In the unfortunate circumstances that I and my immediate family die together, who should my estate pass to? 6. If my life partner and I both die together, who would look a er my children (i.e. who should be the guardian of your children)? 7. Are there any specific wishes I would like noted? 8. Are any specific estate planning strategies likely to be useful for my intended beneficiaries, for example testamentary trusts, superannua on nomina ons or pre death asset transfers to diminish the value of your wealth at the date of death? What happens to my assets in the estate if I die without a will? If you die without a will, the law says that your assets will be distributed to your family, as determined by a set Government formula, which is different in every Australian state. 2
To provide some general examples of the possible outcomes (bearing in mind the actual outcomes will be different in each state), if you die leaving: 1. your spouse, but no children: your spouse receives the en re estate; 2. your spouse and children: your spouse receives the first $150,000 and one half of the balance of the estate (if there is one child), or one third of the balance (if there is more than one child); 3. children but no spouse: your children receive a share each, but only if 18 years of age or married; 4. no spouse or children: your parents will share the estate; and 5. no spouse or children and no parents: your siblings share the estate equally. The amount received by each person will depend on the value of the estate and whether any other beneficiaries are en tled to your assets. If you do not have any family members who qualify, then the assets may pass to the Government. It is necessary that someone apply to the Court to be appointed as the administrator, to ensure that your estate is properly distributed. Failure to do so may result in addi onal me and costs to the administra on of the estate. If you have young children and a guardian is needed, an applica on to the Court may also have to be made to confirm who will act in this role. If I have an exis ng will, do I need to change it or execute a new will? You should review your will regularly to ensure it remains up to date with your current wishes. To ensure that this remains the case you should carefully consider the following ques ons (where applicable): 1. Who should be the executor of my will? 2. Who should be appointed to make financial, personal and medical decisions on my behalf if I lose the capacity to make these decisions myself? 3. If my first named executor or a orney is not able to act, who would I appoint? 4. Other than my immediate family, are there any other individuals or en es I would like to leave part of my estate to? 5. In the unfortunate circumstances that I and my immediate family die together, who should my estate pass to? 6. If my life partner and I both die together, who would look a er my children? (i.e. who should be the guardian of your children) 7. Are there any specific wishes I would like noted? Testamentary Trusts What is a testamentary trust? A testamentary trust (TT) is a trust established in someone s will. A TT comes into existence only when the person dies. A lineal descendant TT is a trust established in someone s will for the benefit of their lineal descendants. 3
In the above diagram, it is assumed that someone died at Point A. The executor s job involves finding all the assets, paying out any debts and usually, at Point B, distribu ng what s le to the beneficiaries. If there is a TT, part or all of what s le remains in the estate and is distributed later at any me between Point B and Point C, depending on the terms of the will. Point C can generally be up to 80 years from Point A. A will can establish more than one TT. Who controls the assets? Whoever is named in the will as trustee controls the trust assets. Like any trust, a TT can be as flexible or restric ve as desired. The trustee can be given full discre on or no discre on as to who should receive income and capital from the trust and when they should receive it. The trustee is o en the same person who was appointed as executor, and can also be a beneficiary. For example, a parent can establish a testamentary trust for each child s inheritance. Each adult child can be the trustee of their own trust, and may also be an executor. Can I use testamentary trusts to split income with young children? Yes, as an estate planning strategy, using a testamentary trust can be of benefit: 1. for families with small children or grandchildren; 2. where extra income would be needed to support the surviving families should a parent die; and 3. where minimising tax is important. How does a testamentary trust work? Rather than all the deceased s assets being distributed by the executor upon death, some or all of the assets remain in trust for the benefit of a specific group of beneficiaries named in the will. Trust income distributed to children, of any age, will be taxed at adult rates rather than the penalty rates that normally apply to minors unearned income. As noted above, the trustee can have full discre on as to who receives trust income and capital, or restric ons can be provided. Why use a lineal descendant trust? A lineal descendant trust (LDT) is established for your lineal descendants your children and grandchildren, and on down your lineal family tree. A properly dra ed LDT can assist in keeping an inheritance out of the reach of the Family Court where a beneficiary is involved in a family law property dispute. How do I protect inheritances from the in-laws? Many parents are concerned that the inheritance they leave to their children could end up in the hands of a sonin-law or daughter-in-law if their child s marriage breaks down. If a child receives an inheritance in their own name, that inheritance will generally be intermingled with the child s other assets (e.g. by paying off a mortgage) and thus will become matrimonial property available for distribu on by the Family Court. However, if you give each child their inheritance via a LDT 4
provided for in your will, those assets can be kept apart and protected from direct distribu on. How successfully the assets are protected depends on how the will and LDT are dra ed and the circumstances at the me of dra ing so specialist advice should be obtained. Reviewing a testamentary trust in your exis ng will Given the constantly changing rules in rela on to trusts, it may be an appropriate junc on to review your will to ensure the testamentary trust remains appropriate for your circumstances. Some of the issues that may impact on the adequacy of your current documents include: 1. changes to the taxa on laws concerning trusts; 2. changes in the circumstances of any trustees or beneficiaries men oned under the current documents; 3. whether a single testamentary trust should be used for all intended beneficiaries; and 4. whether separate testamentary trusts should be used for each main beneficiary (e.g. one testamentary trust for each child). Is your exis ng will invalid? Obviously, an invalid will is an important reason for reviewing and upda ng your estate planning arrangements. If you are uncertain as to whether your will is valid, some of the things that might cause it to no longer be relevant or legally enforceable include: 1. if you or a person named in the document has been married, divorced or entered into a changed personal rela onship since the document was prepared; 2. if you have had births or deaths of people in your immediate family since the will was signed; 3. if there has been a substan al change in the value of your estate or the nature of the assets that you own; 4. if you have entered into new business arrangements, and in par cular, established en es such as companies, trusts or superannua on funds; 5. if you have moved states since your last will; and 6. if you have started providing financial benefit to people not otherwise receiving en tlements under the current will. 5
Can your exis ng will be challenged? A will can be challenged for a host of reasons ranging from improper signing of the document through to complaints that it did not adequately provide for poten al or actual beneficiaries. Sound estate planning ensures that the formali es needed to have a valid will are sa sfied and that the scope for dispute about its terms is minimised. Li ga on over wills is becoming increasingly common as families become more complex and estates become larger. What is a family provision applica on? A family provision applica on is when someone makes an applica on to a court seeking a share of a deceased s estate or a larger share of a deceased s estate. The court is required to balance the compe ng objec ves of the will maker s freedom to dispose of their property on death in accordance with their wishes and the family financial dependants. The court has the power to decide the merit of the applica on and the sum, if any, to be awarded to the applicant. There is no set method of calcula ng the sum which an applicant should take from the estate of a deceased person. The outcome of a family provision applica on is dependent on the circumstances of each case. How do Courts decide a family provision applica on? The Court will consider a family provision applica on in two stages, being: 1. Stage 1 whether or not adequate provision has been made for the applicant s proper maintenance and support (the applicant must sa sfy the court that inadequate provision has been made before the court can consider making any provision in favour of the applicant); and 2. Stage 2 if adequate provision has not been made, then the court will consider whether an order for provision will be made and, if so, in what amount. Who can contest a will? When a person dies, there are certain people who may be eligible to bring a family provision applica on against a deceased person s estate. Generally those eligible to apply include: 1. the spouse of the deceased; 2. the children of the deceased; and 3. a limited range of financial dependents. What issues will the Court take into account? The Court s primary focus is the applicant s financial needs, however the Court also considers: 1. the size of the estate; 2. the provisions under the will; 3. the applicant s medical needs; 4. contribu ons by the applicant to the build up of the deceased s estate; and 6
5. the rela onship between the applicant and the deceased. 2. it has a trust deed that meets the requirements of the relevant legisla on; 3. it has fewer than five members; Self-Managed Superannua on Fund (SMSF) It is important to have an appropriately qualified specialist periodically review your SMSF Deed to ensure it remains relevant, up to date, and compliant with applicable laws. A non-compliant deed can lead to penal es such as a loss of tax concessions. A comprehensive review should also be conducted as part of implemen ng your estate plan. A review should specifically consider the different roles within the fund, such as members and trustees, as this can dras cally impact how the proceeds of the fund are distributed on death. Some of the other issues that should be considered include: 1. what type of death benefit nomina ons can be made; 2. what type of pensions can be paid; and 3. whether the deed reflects all recent changes in the law. What is a SMSF? Superannua on is a mechanism designed to provide income to a person on re rement or a lump sum benefit to their dependents on death. Broadly, contribu ons can be made to an independently managed fund or to an SMSF. An SMSF performs the same role as other funds, by inves ng contribu ons and making them available to members on re rement. The main difference is that the members of a SMSF are also the trustees of the fund they control the investment of their contribu ons and the payment of their benefits. As all members are trustees, they are in a posi on to ensure their interests as members are protected. Generally, a superannua on fund is an SMSF if: 1. contribu ons can be made; 4. each member of the fund is a trustee (or a director of the trustee company); and 5. no trustee (or director) of the fund receives any remunera on for their services as trustee. How is an SMSF established? There are a number of steps that need to be undertaken to set up an SMSF. These include: 1. obtaining a trust deed, and ensuring that it is correctly dra ed to achieve the fund s objec ves; 2. appoin ng trustees to manage the fund; 3. elec ng to become a regulated fund. Elec ons must be lodged with the Australian Tax Office, and en tles the fund to receive concessional taxa on treatment; and 4. obtaining a Tax File Number and Australian Business Number. Do you need to review your SMSF? Superannua on structures need to be strategically reviewed on a regular basis to ensure that they comply with the rapidly changing laws and that their tax-effec ve value is maximised. It is important to remember that your will does not govern where your superannua on proceeds will go. It is therefore important that you regularly review your nomina ons to ensure they are s ll appropriate for you. One of the issues that may be relevant in this regard include: 1. whether binding or non-binding nomina ons should be used; 2. whether the par es nominated as beneficiaries are appropriate; 3. what the tax consequences of the nomina on are; and 7
4. whether all superannua on en tlements (including insurance) are covered by the nomina on. Do you need to make a superannua on nomina on? Superannua on, and the proceeds of life insurance policies held via superannua on, should be carefully dealt with as part of an estate plan. Superannua on structures need to be strategically reviewed on a regular basis to ensure that they comply with the rapidly changing laws and that their tax-effec ve value is maximised. It is important to remember that your will does not govern where your superannua on proceeds will go. A summary of some of the key issues to consider in rela on to superannua on en tlements is set out below. Employer funds Many employer funds leave the ul mate discre on as to the distribu on of superannua on benefits on death to the fund trustees. This said, the member is usually able to nominate who they would like to see receive their benefits and this nomina on is generally followed. Retail funds Many retail funds leave the decision as to the distribu on of superannua on benefits on death to the fund trustee. Where the fund has provided a facility for nomina ng a beneficiary, that nomina on will invariably be followed unless there are compelling reasons not to. Binding death benefit nomina ons Some funds offer a binding death benefit nomina on facility. If this is available and chosen by the member, the fund trustee must pay the deceased s benefit to the person or people nominated. SMSFs In most cases the con nuing trustee of a SMSF, or the trustee of the will decides how a deceased member s death benefit will be treated. It is cri cal therefore to ensure you are comfortable with the person or people who will be making the decision either directly or as trustee of your will. Alterna vely, binding nomina ons can be u lised. Know the rules Ul mately, the trust deed governing the fund holding your superannua on en tlements will determine the process for dealing with your superannua on assets following your death. It is therefore important to consider these rules as part of a comprehensive estate plan. Flexibility Other than where absolute certainty is required as to where any benefits will be paid, it is normally preferable to leave discre on with the trustee. The reason for this is that taxa on and related laws as well as the circumstances of poten al beneficiaries may con nue to change. Rather than trying to predict the best outcome today, it is normally be er to leave this decision un l it actually needs to be made. Power of A orney What is a power of a orney? Powers of a orney vary depending on which state or territory you are in. The main types of powers of a orney 8
are summarised below. Overview A general power of a orney is where you appoint someone to make financial and legal decisions for you, usually for a specified period of me. An enduring power of a orney is where you appoint a person to make financial and legal decisions, including if you have lost the capacity to make your own decisions. A medical power of a orney can make only medical decisions on your behalf if you become unable to do so yourself. Powers of a orney Using a power of a orney, you can select the person or people you wish to look a er your affairs if you are incapacitated through illness, accident or old age. A power of a orney will specify the powers you wish to give to one or more people and can give direc ons about your wishes in rela on to what happens to you and your assets. Powers of a orney can be either general or limited. Under a general power of a orney, the a orney is able to do virtually all things the person giving the power could legally do. Under a limited power of a orney, the power is restricted in some way. For example, the a orney may be appointed only for a certain me or only to perform certain acts. Is an enduring power of a orney necessary? In any estate planning exercise, an enduring power of a orney should always be used. Enduring powers of a orney con nue to be valid, even if the donor loses capacity. In contrast, other types of a orney documents become void when the donor loses capacity. If no one is appointed as your enduring power of a orney, someone (for example, a spouse, child, trusted rela ve or friend) will need to apply to a court or a government tribunal to be appointed. It is likely that an officer from the government will also need to be involved in the management of your affairs which generally adds significant extra (and unnecessary) expense, both financially and emo onally. Do you need to review your exis ng power of a orney? It is important that you regularly review (and if necessary modify) your a orney nomina ons to ensure they are appropriate from me to me. Some of the reasons that may mean you should revisit your exis ng arrangements in this regard include: 1. change in the matrimonial or life spouse arrangements of you or any a orney; 2. death or incapacity of an a orney; 3. moving of state; 4. children turning 18; and 5. change in the value of your assets. Estate consequences in company ownership and control The impact of your involvement with a company on your estate planning arrangements is an issue you should receive specific specialist advice on. Set out below is an overview of some of the issues likely to be relevant. What happens to company shares owned by the testator upon death? Unlike a trust, a company is a separate legal en ty. It has its own legal iden ty that is discrete from the shareholders. Companies can own property, enter into contracts and be subject to legal liability in the same manner as an ordinary person. Shares represent ownership of a company. However, even as owner, a shareholder is not en tled to the assets of the company. Thus, the death of a shareholder has no effect on the company s con nuing existence. However, the shares owned by the testator in a company form part of their estate assets and can be disposed of by their will. During the period when the testator s estate is being administered, their executor will be able to exercise any 9
rights that a ach to their shares (for example, vo ng at general mee ngs). What happens to the debts owed to the testator by the company? A company can o en owe money to its shareholders. This may arise (for example) if a shareholder lends the dividends earned by them back to the company. This then becomes a separate asset of a testator to the shares themselves. Ordinarily, it would be expected that an individual will intend both their shares and the loan asset to pass to the same person under an estate plan, however, this should be specified, otherwise the loan simply becomes part of the residuary estate. There are several op ons for testators who are owed money by a company, including: 1. allow the same beneficiary to receive both the shares in the company and the loan (either directly, or via a trust); 2. allow the loan to become part of the residuary estate so that the beneficiary who receives the residuary estate becomes en tled to the loan; 3. allocate the loan to a separate beneficiary; 4. ensure the loan is repaid prior to death; or 5. forgive the loan to the company. There are a range of poten al tax and stamp duty consequences in rela on to each of the above alterna ves. What happens to the debts owed by the testator to the company? A debt owed by the shareholder to the company ordinarily arises from a debit loan account. There are a number of poten al tax consequences in dealing with the debit loan (par cularly under the deemed dividend rules in Division 7A of the Income Tax Assessment Act 1936 (Cth)). Prac cally, subject to managing the tax issues, any debt owed by a testator to a company on death may be: 1. repaid by the estate; 2. forgiven; 3. repaid prior to death; or 4. allowed to form part of the estate, such that a beneficiary takes over the repayment obliga ons. Estate consequences in ownership and control in a partnership What is a partnership? The impact of your partnership on your estate planning arrangements is an issue you should receive specific specialist advice on. Set out below is an overview of some of the key issues likely to be relevant. A partnership is a rela onship which exists between persons carrying on a business in common with a view of profit. 10
O en there will be a partnership agreement in place which sets out the rights and obliga ons of the partners, par cularly on death. If there is a partnership agreement, its provisions will determine the conduct of the business and how the assets and liabili es (including tax) of the business are dealt with. Where there is no agreement, the liabili es and obliga ons in partnerships are simply shared jointly between the partners. A limited partnership is where one or more of the members have contributed capital to the business, but usually take no part in the management. The limited partner is only liable for the debts of the partnership to the value of the capital contributed. What are the assets of the partnership? Assets in a partnership can be held by the partners via a corporate or trust structure or individually. The assets of a partnership may include: 1. goodwill; 2. business assets, such as stock; 3. land or interests in land; 4. intellectual property; and 5. shares in a company, or units in a unit trust. What happens to partnership assets owned by the testator upon death? When an individual ceases to be part of a partnership, the partnership will usually be at an end, unless the partnership agreement provides otherwise. This means that the deceased partner s executor has the right to demand that the value of the deceased partner s interest in the partnership be transferred to the estate. If this occurs, the assets of the partnership may need to be sold in order for the outgoing partner s interest to be disposed of. An individual partner can make provision in their will for the succession of their interest in the partnership, although any contrary agreements made while the partner is s ll alive will take precedence over the will. It is important for all partners to determine whether they wish the partnership to con nue on the exit of a partner and ideally for appropriate provision to be made in a partnership agreement. If the partnership con nues generally, the con nuing partners will have the right to acquire the interest of the outgoing partner (or their estate) under the partnership agreement. An insurance funded buy-sell arrangement is o en used as a way to keep the partnership opera ng and to give the remaining partners an opportunity to acquire the outgoing partner s interest. Debts owed to the testator by a partnership Debts that are owed to the testator by a partnership can include: 1. loans made to the partnership; 2. unpaid distribu ons of partnership profit; and 3. unpaid partnership management fees or salary. 11
How can debts owed to a testator be dealt with? As is the case with debts owed by a company or trust, there are several op ons for debts owed to a partner on death, including: 1. leave the debts as they are, with the outgoing partner (or their estate) able to demand immediate repayment; or 2. if the debts are currently on an informal basis, (that is, made on a handshake) document the agreed terms in wri ng. Obviously, however, even if there is a formal agreement, a repayment obliga on on a partnership may cause financial hardship, par cularly considering that the earning poten al of the partnership may be reduced by the loss of a partner. What does debts owed by the testator to a partnership include? These debts are usually loans made by the partnership to the partners. They may also be advances against an cipated future drawings. 3. insurance may be taken out over the debts owed by the partner, so that the partnership may be fully repaid. Family Trust What are the fundamental aspects of a trust structure? Whether a family trust is likely to be useful for your circumstances is something you should receive specific advice on. Set out below is an overview of some of the fundamental aspects of the trust structure and answers to a number of frequently asked ques ons. Legal basics A trust is in effect simply a legal rela onship where there is: 1. a legal owner of property (the trustee ); 2. who holds the property ( trust property ); 3. for the benefit of others (the beneficiaries ); and 4. pursuant to certain terms or rules ( trust deed ). How can debts owed by a testator be dealt with? The op ons for debts owed by a partner include: 1. leave the debts as they are, with the partnership able to demand repayment from the estate of the deceased partner; 2. document the debts in wri ng; or 12
Diagramma cally, the structure of a trust is represented as follows: make any amendments to the trust deed. If the trust deed does not name an appointor, the exis ng trustee will usually have the power to appoint a new trustee. Beneficiaries The discre onary trust structure enables income that is earned by the trust to be distributed to the beneficiaries of the trust in such propor ons as the trustee decides. Trustee The trustee of the trust is the legal owner of the property. The trustee will therefore have the ul mate control over the assets of the trust. The trustee can be a company or one or more individuals. Where the trustee is a company the directors of the company will have the day to day control of the trust. As the directors are appointed by the shareholders of the company, then the shareholders will have the ul mate control over the trust. Despite this ul mate control, the shares in the trustee company will normally only be worth a nominal amount, regardless of the value of the assets in the trust which the trustee company controls. In some Australian states care needs to be taken from a stamp duty perspec ve in rela on to shares in trustee companies as the Stamps Office may have the ability to a ribute far greater value to the shares in the trustee company based on the value of the trust assets rather than the value of the shares themselves. Although the trustee is responsible for the day-to-day running of the trust, many trusts also have an appointor who retains ul mate control over the trust. The appointor has the ability to appoint and remove the trustee at any me, and its consent may be required to Normally, there are a large number of beneficiaries set out, including (for example) a mother and father, their children and grandchildren, any brothers or sisters of any one men oned before, any other trust in which any of these people are poten al beneficiaries, any company in which any of these people hold any interest etc. These people are normally referred to as discre onary beneficiaries. The idea of including a large number of discre onary beneficiaries is to allow the trustee maximum flexibility when distribu ng income. The trustee has the ability to decide the propor ons in which the income of the trust is distributed among these poten al beneficiaries on the basis of what will be appropriate given the needs of the beneficiaries and what is most tax effec ve in any given year. One common strategy is to include a company as a poten al beneficiary of the trust. As companies are currently taxed at a flat rate of 30% it can be an effec ve strategy to distribute income from the trust to the company so as to limit the overall tax paid by a family group. Normally there will be one or two people who have an expecta on of receiving income from the trust. These people are commonly referred to as the primary beneficiaries. Most trusts set out who is to be en tled to the income of the trust if the trustee does not exercise its discre on to decide how to distribute the income. These are known as the default beneficiaries. Most trusts separately set out who are the default beneficiaries for any income that has not been distributed at the end of each year, and who are the default beneficiaries for capital upon winding up of the trust. The default beneficiaries are o en the same people as the primary beneficiaries. 13
Trust deed Every trust is governed by a trust deed. This sets out how the trust must be run, what the trustees can do in running the trust and who the beneficiaries are. Discre onary trusts have been used as a tax effec ve asset owning vehicle for a long me. Consequently, there are a large number of trusts that are governed by trust deeds that were dra ed when tax laws and trust law were significantly different. Where a trust is established under a will (a testamentary trust) the rules of the trust (or the trust deed ) are set out in the will itself. It is necessary to review a trust deed periodically to ensure that it allows the trustees to operate the trust in the most tax effec ve way. It is also important to review the terms of the trust deed carefully with par cular reference to issues such as: 1. the ves ng day (or ending day) of the trust. In most Australian states the maximum length of me a trust can last for is 80 years; 2. whether there is an appointor, principal or nominator. This person or en ty has the ability to remove and appoint trustees in their total discre on; 3. the powers the trustee has in rela on to administering the trust. For example, o en trustees may not have the ability to grant op ons in rela on to trust property; and 4. what provisions apply in the event a trustee fails to make a distribu on. How long can a trust con nue to exist? The trust deed generally sets out how long a trust is to last, and at what point the income and assets of the trust will be distributed. However, a trust deed is subject to the law in rela on to perpetui es, which, other than in South Australia, prevents a trust from exis ng longer than 80 years. The day on which the trust ends is called the ves ng date. When the trust ends, the assets remaining in the trust, plus any income historically accumulated, must be distributed to the beneficiaries by the trustee. No assets must be le in the trust, and the trust must not con nue to exist. What happens to trust assets when the main decision maker dies? Trust assets are not governed by a testator s will. Unless the trust deed makes specific provision for the distribu on of assets upon the death of a par cular person, the trustee or replacement trustee will make that decision. Usually, the trust deed will provide for replacing a deceased trustee. Many trust deeds provide for an appointor (also referred to as a principal or nominator) who has the power to unilaterally appoint or remove a trustee. What is a family discre onary trust? A family discre onary trust is a trust where the trustee is given wide powers to determine which beneficiaries 14
should receive the income and capital from the trust, and when that distribu on should occur. In a discre onary trust, the beneficiaries do not have any right to distribu ons of income or capital as those distribu ons occur according to the trustee s discre on. The trustee is also given discre on as to the types of investments that may be carried out, on behalf of the beneficiaries. Ordinarily, the beneficiaries in a family discre onary trust are immediate family members, as well as brothers, sisters, cousins or any associated family companies. It is common for family businesses to be conducted through discre onary trusts. How are trusts taxed? As a trust is not a separate legal en ty, it is not itself taxed. However, the trustee has the duty of lodging a tax return for the trust. Beneficiaries who have received income and capital from the trust throughout each financial year include those amounts in their own personal tax returns and are taxed in the usual way. Where a beneficiary has received income, but is a minor, then the trustee is assessable for tax on that income as if it were the income of the trustee. Generally in rela on to family trusts the tax rate for minors is 48.5%. Any undistributed funds are also included in the tax return completed by the trustee. Undistributed income is also taxed at 48.5% in the hands of the trustee. Beneficiaries who have not received income from the trust are said to have a mere expectancy to receive income from the trust in the future. Accordingly, the trustee must pay tax on any undistributed income on the basis that no beneficiary is presently en tled. There have been a number of recent changes to the laws rela ng to the taxa on of trusts. In summary: 1. an announcement in December 2010 to rewrite the trust tax rules in response to the Bamford decision; 2. an announcement in March 2011 to amend the rules rela ng to trust income and taxable income and deal with the streaming of capital gains and dividends; 3. a further announcement in the middle of April 2011 by the Government changing its posi on such that the proposed rules would only deal with streaming capital gains and dividends by 30 June 2011; 4. legisla on was subsequently amended dealing with streaming capital gains and dividends applicable for 30 June 2011 and onwards; and 5. there is currently consulta on taking place regarding the rewrite of the trust tax rules to align trust income and taxable income. Generally therefore, trust deeds should be reviewed and possibly updated in light of the above changes, for issues such as: 1. powers to clarify the treatment of unpaid distribu ons to beneficiaries; 2. powers clarifying the trustee s ability to hold amounts as loans or unpaid en tlements; 3. amendments to the income defini ons to clarify the trustee s power to recharacterise receipts; 4. permit the trustee to rely on the concessions concerning the ming by when resolu ons for distribu ons need to be made; and 5. addi onal powers of the trustee and related provisions to improve the administra ve efficiency of the trust, including powers to permit the trust to be cloned or split. Is there a need to update an exis ng family trust? Due to the ongoing changes to the taxa on of trusts, it may be appropriate to consider reviewing and upda ng your trust deed. Some of the issues to consider are detailed below. 15
Further assistance View Legal specialises in structuring all aspects of estate planning and related. View Legal can assist in rela on to any of the issues considered in this white paper. If you have any ques ons, please contact the adviser who referred you to this whitepaper or one of the lead lawyers at View Legal on 1300 843 900 or via an email address or phone number listed below: Further informa on about View Legal can be found at www.viewlegal.com.au Disclaimer This white paper covers legal issues in a general way. It is not designed to express opinions on specific cases. This white paper is intended for informa on purposes only and should not be regarded as legal advice. View Legal does not assume a duty of care in connec on with this white paper. Further advice should be obtained before taking ac on on any issue dealt with in this white paper. Ma hew Burgess Director Tara Lucke Director Patrick Ellwood Director Naomi Arnold Director Email ma hew.burgess@viewlegal.com.au Phone 0403 209 977 Email tara.lucke@viewlegal.com.au Phone 0417 578 150 Email patrick.ellwood@viewlegal.com.au Phone 0400 503 111 Email naomi.arnold@viewlegal.com.au Phone 0432 400 488 16
Estate Planning Client Ques onnaire Should you wish for us to assist you in your estate planning arrangement, please complete the following ques onnaire and provide it to the advisor who referred you to this whitepaper. Personal details Your full name: Your residen al address: Full name of your spouse (if applicable): Children and dependents Full legal names of each of your children: Family details Full name of other par es included in the will and your rela on to each: Details of the will Full name of your executors in the first instance: Full name of your backup executors: Full name of your further backup executors (if applicable): Full name of your guardians (if applicable): Full name of your backup guardians (if applicable): Number of testamentary trusts (TTs): 17
Should the beneficiaries of each TT be limited to lineal descendants? Full name of the trustees of each testamentary trusts: Do you have par cular wishes regarding specific items of property you wish to give or are there other special clauses which you wish to be included in your will? Where should your estate pass in case of calamity (i.e. all immediate family dying in the same incident)? What are the details of your superannua on fund? Have you nominated someone as the beneficiary or have you signed a Binding Death Benefit Nomina on? Is there any other informa on you believe relevant in connec on with your estate plan? Details of your Enduring Power of A orney (EPA) Full name of your a orney(s) in first instance for financial ma ers: Full name of your backup a orney(s) for financial ma ers: How do you wish your backup a orneys to act (whether jointly/by majority/other)? Full name of your a orney(s) in first instance for medical ma ers: Full name of your backup a orney(s) for medical ma ers: How do you wish your backup a orneys to act (whether jointly/by majority/other)? 18