Sometimes the beneficiaries of a will wish that the testator had arranged things differently. For example, suppose Bill died leaving everything to his wife Jean. If Jean’s income following his death is, say, $100,000, her income tax and medicare levy will be nearly $30,000. Because of recent increases in property values and other investments, this is common, especially if Jean also works.
If she has 3 dependant children, the overall tax could be reduced to just over $3,000 if she could spread the income between herself and the children for tax purposes. That is a serious saving – every year.
An ‘estate proceeds trust’ occurs where a person has received a gift under a will (like Jean) and transfers part or all of the property represented by that gift to a trust for the benefit of a minor.
The income tax legislation provides that income flowing to a minor from such a trust is ‘excepted trust income’. This means that each child’s share of income is separately taxed in the same way as an adult. The first $6,000 is exempt, the next $24,000 is taxed at 15%, and so on (plus the medicare levy).
So, Jean could transfer to a trust for each of the children part of the amount she receives from the estate, and income flowing to the children from that trust may qualify as ‘excepted trust income’, potentially reducing the overall tax by more than $26,600 every year.
The 3 main requirements are
- firstly, that Jean sets up the trust within 3 years after the death of the deceased;
- secondly, that the amount transferred to the trust is no more than the amount that the relevant child would have received from the estate had there been no will; and
- thirdly, the child must be entitled to the assets of the trust when it comes to an end (normally when the child turns 18). This is not a discretionary trust.
The amount that can effectively be transferred to the trust varies from State to State. For example, on intestacy in Queensland the spouse gets the first $150,000 plus the household chattels, and either half the remainder (if there is 1 child) or 1/3rd (if there are 2 or more children). The remainder is divided equally between the children, and this is the amount that can be transferred to an estate proceeds trust.
In New South Wales, the spouse gets the first $200,000 and 50% of the balance, and the remainder goes to the children.
In Victoria, the partner (married or defacto) gets the household chattels, the first $100,000, interest on that amount, and one third of the balance of the estate. The remainder goes to the children.
The other States and territories each have their own provisions, and we can advise on these where appropriate.
If more than the maximum limit is transferred to the trust, excess income will not be excepted. In practice such a transfer opens up great possibilities for arguments between the trustee and the tax department, which are best avoided by carefully controlling the amount contributed to the trust.
While theoretically the trust might be expressed to end (with the property vesting in the beneficiary) at some age greater than 18, in fact the beneficiary will be entitled to call for the capital at 18 unless he or she is under a legal disability.
Where the beneficiary is under a legal disability other than minority, specialised advice is required. A trust set up in the testator’s will is far more flexible and preferable.
If the beneficiary dies before the trust ends, the trust fund is paid to the child’s estate.
You need to obtain advice about stamp duty before transferring assets other than money to the trustee of an estate proceeds trust. For example, although in Queensland one might mount an argument that a transfer of otherwise dutiable assets is exempt, you should assume that duty will be payable. Try to use money.
Linda Goldsmith
Consultant
Phone: 61 3 9602 9738
Linda_Goldsmith@tresscox.com.au
With Terry Matthews and Rod Murphy.
To see the contact details of the entire TressCox Estate Planning, Trusts & Estate Litigation Team please click here.
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