Estate Planning - Trusts Created By A Will Funded By The Will Maker - Part 1: The Will

Date: January 13, 2010

Authors: Michael Pickering B.A., LL.B. (Hons.), LL.M., M. A.

Other articles in this series

This article provides an understanding of the operation of what is called testamentary trusts. These are trusts created by a will and funded by the will maker’s estate and payments made to the will maker’s estate as a consequence of the will maker’s death.   Examples might be death benefits arising from personally owned life insurance policies or superannuation death benefits which are not paid directly to the will maker’s dependents.

The Will

A will is a legal document in which the will maker sets out how and to whom his or her personally owned assets are to be distributed after death, the manner in which his or her estate is to be administered and the powers the executors are given. 

All Australian States and Territories have legislation governing the activities of trustees. This legislation confers powers on the executors appointed by the terms of the will. Because they are the deceased’s legal personal representatives, executors are given responsibility for administering the will maker’s estate but may also gain personal control of non-estate assets such as self-managed superannuation funds and family discretionary and hybrid trusts.

A valid will must have certain requirements:

  • Must be made by a person with sufficient decision-making capacity;
  • Must be made by someone over 18 years of age or, if under 18 years of age, is legally married;
  • Must be in writing; and
  • Must be executed by the will maker in the presence of at least two adult witnesses.

The purpose of a will is not only to set out who is to inherit personally owned assets but also to set out how those persons are to inherit those assets.

There are increasingly complicated inter-relationships between the deceased’s estate and the deceased’s superannuation entitlement where these inter-relationships’ impact upon the operation and use of testamentary trusts.

Under superannuation law, there is no option for the trustee of the superannuation fund to pay a new or a continuing death benefit pension to an adult child who does not have a significant disability. The loss of the pension option in these circumstances increases the likelihood that the option of using superannuation death benefits to fund testamentary trusts will want to be taken up by the adult children. The introduction of a $150,000.00 ceiling upon contributions to a superannuation fund will also prevent beneficiaries receiving inheritance from making a large lump sum contribution to superannuation.   This is because the Centrelink advantages of a lifetime and “term certain” income streams do not apply to income streams commenced after 20 July 2007.

A question arises as to the difference between using a testamentary trust for the primary benefit of will beneficiaries who are at least 60 years of age in comparison to superannuation pension income.   The trust income is subject to tax whereas the superannuation pension income is tax free. This means that mandatory testamentary trusts which generate significant income for a beneficiary who is at least 60 years of age will be an expensive option due to the incidence of income tax.   On the other hand, however, two favourable aspects of testamentary trusts are the wider definition of a family group for a test individual in respect of a family trust election and the 2006 and 2007 changes to the small business CGT concessions.

This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this article without first obtaining specific professional advice.

 

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