What happens when a person dies and they didn’t include a testamentary trust in their will? Is it possible to set up a post-death testamentary trust? The answer is Yes, maybe, sometimes….. Watch to find out more.

The transcript of the above video is below:

Hi, it’s Tara Lucke here!  I had a question come through the Art of Estate Planning Facebook group a while ago about whether it is possible to set up a testamentary trust post-death. We are talking about a testamentary trust that’s not included in the will when a person dies. The answer is yes, but they are inferior on every test. So, don’t rely on them. Do a testamentary trust upfront in the will.

These types of testamentary trusts set up after somebody dies are often called post death testamentary trusts or an estate proceeds trust.

So, there is an ability under section 102AG of the Tax Act to contribute assets that were inherited into a trust environment within three years from the date that the person leaving the inheritance died and you can then get excepted trust income treatment on the amounts contributed. So, excepted trust income treatment, as a reminder, is basically the rule where minors can be taxed income earned by the trust at adult marginal rates, so they don’t pay the penalty tax. The amount that you can access excepted trust income for in a post death trust is only the amount that would have been received on intestacy by those beneficiaries of the trust.

So, depending on which state you are in, that can be very limiting in terms of the options. If you’re in Queensland, it does work in a narrow range of circumstances. So, let’s look at this scenario: we’ve got a couple, husband and wife, and they’ve got two children. In Queensland, under the intestacy rules, the first $150,000 goes to the spouse and then the rest of the assets in the estate would be split between the spouse and the two children equally. So, in this case, after the $150,000; two-thirds of everything else could be contributed into a post death testamentary trust and you could then stream the income on that two-thirds to the children at adult marginal rates for tax purposes.

So, that could be useful because our surviving husband if he has received everything under the will – this is usually the case where the will is a basic will and the wife has left everything to the husband. Perhaps the husband has some asset protection concerns or is on a high income already, you could use the post-death trust in that case to have the two-thirds of the inheritance after the $150,000 sit within a tax effective environment.

If you’re in a state like New South Wales, on intestacy, everything goes to the surviving spouse. In that situation, you actually have no amount that you can contribute into a post death trust that’s eligible for excepted trust income. So, the strategy just wouldn’t work in New South Wales.

Also, it is difficult if you’ve got grandchildren. You can’t use the strategy because grandchildren are rarely going to be able to receive the estate on intestacy unless we work through all those provisions.  So, your first problem with a post-death trust is that it really only has a very narrow range of circumstances where you get the tax treatment as excepted trust income because of the overlay of the intestacy rules. Where you’ve got the testamentary trust set up in a person’s will, it doesn’t matter. You can have excepted trust income to everybody who is eligible and it’s generation upon generation upon generation. With the post death trust, it’s one generation.

The other thing is that they are really not very great for asset protection because the beneficiaries who are getting the tax treatment have to be absolutely entitled to the trust assets. They have to have capital rights to the trust assets, which is not the case with a testamentary trust set up in a will where the capital entitlements are discretionary. Post death trusts are not as useful for asset protection on family law or bankruptcy.

The other thing is that you can only really contribute assets that don’t have latent capital gains tax or stamp duty costs associated with them because there is no exemption to contribute to a post-death trust. For any assets that are distributed under the will, there ae CGT and stamp duty exemptions. But post death trust contributions are made after the estate administration and they’re not considered pursuant to a will, so you’re not going to get any exemptions. You’re really restricted on the types of assets that you can put into them as well.

My assessment: if you have a client who has not used a testamentary trust in their will and could receive some benefit of a post death trust – then ask the question. I’m very happy to do an analysis for you to work out whether it could be useful. In my experience, there is only a very narrow range of circumstances where it works. So, don’t rely on the idea that you can use a post death trust as a backup for a properly structured testamentary trust because on every test they are inferior, and a lot of the time they are not even useful.

So, get the testamentary trusts set up in the will proactively. They’re my favourite estate planning tool. They’re so powerful. You really only get one shot. It’s very hard to reverse engineer those outcomes.

So, that’s it for me for today. If you’ve got any questions, as always, please feel free to get in touch. Have a great day!