Testamentary Trusts and Succession Planning for Lawyers

by

Dr John de Groot, Special Counsel,

de Groots Wills and Estate Lawyersfor

North Queensland Law Association Conference 2011at

Townsville - Saturday, 28 May 2011

OVERVIEW OF ESTATE PLANNINGOVERVIEW OF ESTATE PLANNING

• Wealth creation

• Wealth and family protection

• Wealth transfer

GENERAL OBSERVATIONSGENERAL OBSERVATIONS

1. Client interest usually mirrors life

2. Some approaches tick each box• Superannuation

• Testamentary trusts

GENERAL COMMENTS ON GENERAL COMMENTS ON TESTAMENTARY TRUSTSTESTAMENTARY TRUSTS

1. “Testamentary Trust” not a technical term – usually refers to a discretionary trust established by the will

2. Perceived benefits:• Asset protection

• Family Court relevance

• Taxation advantages

ISSUES/FEATURES OF ISSUES/FEATURES OF TESTAMENTARY TRUSTSTESTAMENTARY TRUSTS

1. Some enable beneficiaries to be added• Ok Qld – s33R but not in ACT, SA and WA

• Implications, e.g. land in SA – effectively two trusts

2.My personal preference now ‘keep it within the family’, i.e. beneficiary (child) and his/her issue

3.Age at which child assumes trusteeship

ISSUES/FEATURES OF ISSUES/FEATURES OF TESTAMENTARY TRUSTSTESTAMENTARY TRUSTS

4. Other provision ‘to keep it in the family’• If three children and one dies without issue

5. Power to appoint and dismiss trustee

• Appointor powers often exaggerated:- “I control the trust”

- Widow story

- Can be power to close stable gate after horse bolted

- Remarks in Death and Taxes, p 30. example

2 220.10

ISSUES/FEATURES OF ISSUES/FEATURES OF TESTAMENTARY TRUSTSTESTAMENTARY TRUSTS

6. Bypass option

• Remarks in Death and Taxes, p 30. example 2 220.20

• Can result in loss of asset protection to beneficiary – if she/he is or becomes sole executor:

• Option right could pass to trustee in bankruptcy

• Right to request but decision is for executor(s) (but what if she/he is or becomes sole executor)

ISSUES/FEATURES OF ISSUES/FEATURES OF TESTAMENTARY TRUSTSTESTAMENTARY TRUSTS

7. Non-resident trustee

• Relevance for CGT for assets that don’t have necessary connection to Australia viz:- Land or building outside Australia- Portfolio of shares

(Non-resident beneficiaries can add ‘costs’ to other beneficiaries if will provisions deficient)

ISSUES/FEATURES OF ISSUES/FEATURES OF TESTAMENTARY TRUSTSTESTAMENTARY TRUSTS

8. Ongoing control issues

• What happens (or should happen) on death of sole trustee

• Issues of control for next generation – usually grandchildren

ISSUES/FEATURES OF ISSUES/FEATURES OF TESTAMENTARY TRUSTSTESTAMENTARY TRUSTS

8. Ongoing control issues (con’t)

• Vest trust equally in issue on death of sole trustee/child – with remoter issue taking by representation?

(Query if bankruptcy or divorce looming or a reality)

• Time for an independent trustee?

ISSUES/FEATURES OF ISSUES/FEATURES OF TESTAMENTARY TRUSTSTESTAMENTARY TRUSTS

9. Asset protection

• Probably of greatest relevance to us

• Need to look up and sideways

ASSET PROTECTIONASSET PROTECTION

Look up:

• Parents and other’s wills

• Ensure provisions appropriate (if you can), e.g. testamentary trust or gift to inter vivos trust

• Testamentary trust probably best re Family Court

ASSET PROTECTIONASSET PROTECTION

Family Court and Testamentary Trusts

Ward v Ward [2004] FMCA fam193

• Asset pool $900K

• H was beneficiary of TT $300K (so too were his children) where his sister and deceased’s lawyer were trustees (no trust established for either of his sisters)

• Will made 2 days before separation

ASSET PROTECTIONASSET PROTECTION

H’s evidence “to put my inheritance out of the reach of my wife”

Other evidence was:

• In the estate administration file trust was treated as H’s interest

• H would get the benefit of the trust once the matrimonial dispute was over

• Adjustment in matrimonial pool of 7.5%

ASSET PROTECTIONASSET PROTECTION

Gift in an inter vivos trust

• Possible provision:

“I give $___ to X Pty Ltd or the trustee for the time being of the ABC trust (“the trustee”) established by deed of trust dated the ___ day of ___ 20__, as it may be varied from time to time, in the trustee’s capacity as such trustee and if the trust has been wound up before this distribution of my estate has been made then to my personal representative to be held by him, her or them as trustee on the terms of the trust at the time it was wound up”

ASSET PROTECTIONASSET PROTECTION

Sideway risks:

• Spouse as ‘safe haven’

• 99/100 - watch EPA provisions

• Will provisions of ‘safe haven’ – untimely death can undo plan

• Main residence issue

OTHER ISSUESOTHER ISSUES

• Entity control

• Binding death benefit nomination under super deeds

• Enduring power of attorneys and conflicts

• Revocable resolutions (in family trusts) becoming irrevocable on a death