Has the Testamentary Trust lost its appeal?

The 2018 Federal Budget was handed down by the Treasurer Scott Morrison on 8 May 2018. One of the areas addressed in the Budget is an integrity measure in relation to the taxation of Testamentary Trusts.

Testamentary Trusts are a key part of many well-structured estate plans because of the benefits they offer in terms of:

(a) Asset protection from creditors (as the assets are held by the Trustee for the beneficiaries of the Trust) providing protection for the benefit of generations of a family;

(b) Some protection in family law disputes (depending on the circumstances) and the ability to provide structure and control of the Testamentary Trust;

(c) Taxation benefits, including the ability to make distributions to a wide range of adult beneficiaries allowing for tax effective distributions; and

(d) Significant concessional tax treatment for distributions to minors, which Trusts established during lifetime do not offer as minors are taxed at penalty rates. Instead, minors receiving income from Testamentary Trusts are taxed at ordinary adult marginal rates. The low income tax offset also continues to apply to income earned from Testamentary Trusts and accordingly, the combined effect is that a minor can receive up to $20,500.00 of income from a Testamentary Trust without income tax being payable (assuming the are not in receipt of other income).

In the Budget Papers the following measure was announced:

“From 1 July 2019, the concessional tax rates available for minors receiving income from Testamentary Trusts will be limited to income derived from assets that are transferred from the deceased estate or the proceeds of the disposal or investment of those assets.”

The proposal is an anti-avoidance measure to ensure normal adult tax rates will only apply to Testamentary Trust income generated on assets that are transferred to the Testamentary Trust under the terms of the deceased’s Will or the proceeds of the disposal or investment of those assets. In other words, if a Testamentary Trust is “topped up” with new assets not derived from a deceased estate, the concessional treatment will not apply.

It is our view that the measure does not change the present position, as the integrity issue has always been debatable where non-estate assets are added to a Testamentary Trust and, certainly, it does not impact upon the many significant benefits of Testamentary Trust estate planning.

Through the introduction of this measure, Testamentary Trusts have certainly not lost their appeal as a key estate planning tool. Instead, the focus now should be to maximise the assets which pass to the Testamentary Trusts through the Will and to educate Willmakers as to the significant long-term benefits of these Trusts so an opportunity is not missed to take advantage of such structures in their estate planning.

- Bronwen Charleson, Principal Lawyer – Wills, Estates & Succession Planning

Contact Bronwen here

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