In some instances, the ability to utilise the benefits provided for in ITAA36 Pt III Division 6AA is lost, often because the will maker has not received the appropriate advice or has failed to take adequate steps to effectively plan his/her estate.
However, there exists a number of opportunities to make use of the concessional rates of tax provided for by Division 6AA after the death of a will maker, even if the will maker’s will did not specifically provide for this. The two most valuable examples in the estate planning context are:
- the superannuation proceeds trust (18-4O5)
- the estate proceeds trust (18-41O).
18-4O5 Superannuation Proceeds Trust
A superannuation proceeds trust is a specially drafted trust that is capable of receiving superannuation proceeds on behalf of the beneficiary of a deceased fund member. It is usually prepared by deed after death but prior to the payment of the superannuation.
Superannuation proceeds trusts are covered by ITAA36 s 1O2AG(2)(c)(v).
This section provides that income derived by the trustee of a trust, that is the result of the investment of superannuation proceeds transferred to the trustee directly as the result of the death of a person, is expected trust income. It is therefore subject to the concessional rates of tax.
There are a number of matters that need to be carefully considered prior to establishing a superannuation proceeds trust.
Determination of Trustee Superannuation Fund
Unless there is a valid binding nomination in place the decision as to how superannuation proceeds are paid out typically rests with the discretion of the trustee of the fund. It is therefore necessary for the trustee to agree to pay the proceeds directly to the trustee of the superannuation proceeds trust. This requires a formal determination to pay to the trustee. At the outset it is advisable to check the superannuation trustee’s requirements prior to finalising the trust deed. In this context, the issue of whether the trustee is also holding a binding death benefit nomination should also be considered.
It is not satisfactory for a determination to be made in favour of the beneficiary of the fund and then for the trustee to agree to pay it to the trust. This would be regarded as a gifting of the proceeds by the beneficiary that will cause problems from a social security viewpoint.
Definition of Beneficiaries
Generally, to avoid the superannuation proceeds being taxed as an ETP, the definition of beneficiaries in the trust deed needs to be drafted so as to ensure that the proceeds are held on trust only for persons deemed to be tax dependants (18-365) of the fund member.
Distribution of Income from Trust
Any income generated by the superannuation proceeds trust can be distributed to beneficiaries of the trust. By selecting beneficiaries on low marginal tax rates, income tax liabilities can be minimised. The ability of children to utilise the adult tax-free thresholds makes the superannuation proceeds trust more attractive as a planning tool.
One drawback of the superannuation proceeds trust is the requirement that the capital of the trust must ultimately vest in the concessionally taxed beneficiaries of the trust (ITAA36 s 1O2AG(2A)).
However, like any other trust, a superannuation proceeds trust has a life span of 80 years. The concessionally taxed beneficiaries cannot receive the capital until the trustee determines to wind up the trust. The trustee can, however, advance part of the capital to a beneficiary prior to the vesting of the trust. The trustee can also lend the trust capital to a non-concessionally taxed beneficiary.
In What Situation Should a Superannuation Proceeds Trust be Established?
The most obvious situation in which to establish a superannuation proceeds trust is where there are minor dependants of the deceased fund member. This will enable the concessional rates of tax to be utilised to maximum benefit. If there are no such minor dependants, there is little value in establishing a superannuation proceeds trust.
Godfrey died, leaving his wife Sally with the full-time care of four minor children. Godfrey had considerable funds in superannuation. Sally was the nominated beneficiary of his superannuation fund.
Sally has received advice that she should seek to have the superannuation proceeds paid to a superannuation proceeds trust rather than to her directly. Her adviser explained that this would enable her to share income between herself and her children and minimise her overall taxation liability. She was surprised to hear that her young children could take $6,000 tax-free each year. Sally made contact with the trustee of the superannuation fund, who agreed to make a determination to pay the proceeds directly to the trustee of the superannuation proceeds trust.
Last year the superannuation proceeds trust earned almost $25,000 in income. By sharing this around her family, Sally was able to eliminate all taxation liability. Sally is well aware that while she can share in the income of the trust during her lifetime, the capital of the fund must be preserved for the benefit of her children. This does not concern Sally as she intends her children to benefit from her own personal estate in any event.
18-41O Estate Proceeds Trust
An estate proceeds trust is a specially drafted trust that is established by a deed after the death of the will maker to receive assets on behalf of the beneficiaries of the will maker’s estate.