A testamentary trust is a trust that is established within the framework of a will. It only becomes operative on the death of the will maker (“the testator”) and the transfer of property to the trustee by the estate administrator.

Discretions

A testamentary trust normally contains wide discretions similar to those contained in an inter vivos trust. However, care must be taken to ensure the will maker exercises his obligation to choose beneficiaries. There must be compliance with:

• the rule against delegation of testamentary power; and

• the rules regarding certainty of objects.

The rule against delegation of testamentary power has now been abolished in Victoria (s 48 , Wills Act 1997 (Vic)), Queensland (s 33R , Succession Act 1981 (Qld)), Tasmania (s 58 , Wills Act 2008 (Tas)) and the Northern Territory: s 43 , Wills Act 2000 (NT).

Advantages

Some of the advantages of trusts created by will are:

• income distribution to minor beneficiaries where the minor is taxed on “unearned” income in the same way as an adult person;

• the possibility of having undistributed income taxed at ordinary marginal rates applying to an individual rather than at maximum rates;

• the flexibility of distributing income on a discretionary basis among different family members;

• asset protection based on the law that no discretionary beneficiary has an interest in any particular trust asset;

• some limited family law asset protection; and

• the ability to shield assets from certain problem beneficiaries.

Capital Gains Tax

Capital Gains Tax rollover is possible through a testamentary trust to a beneficiary. Care must be taken when dealing with the main residence of the deceased.

Superannuation

Superannuation can be paid to and form part of the assets of a deceased estate. If paid to or exclusively for beneficiaries who would be tax advantaged if paid directly, then those tax advantages will normally flow through.

See Testamentary trusts.

Charitable purposes

Matters to note:

• what is “charitable” in popular parlance may not be “charitable” in the legal sense;

• charitable trusts are concerned with purposes not with persons;

• raising funds for charities through a commercial enterprise may itself be a charitable purpose;

• a trust established for charitable and non-charitable purposes is void at general law (subject to certain statutory provisions); and

• there must normally be a benefit to the public at large or a section of the public.

Classification

Charitable trusts are classified under four main categories:

• the relief of poverty;

• the advancement of education;

• the advancement of religion; and

• other purposes beneficial to the community.

There are also extended meaning conferred by statutes in different jurisdictions, such as the provision of child care services on a not for profit basis.

Advantages

The advantages of a charitable trust are:

• rule against perpetuities does not apply;

• more lenient legal construction;

• income tax exemption; and

• tax deductibility of gifts made to it.

The following are different types of funds:

• public fund;

• public benevolent institution; and

• private ancillary fund.

See Charitable trusts.

Categories

A hybrid trust is simply a trust that possesses the characteristics of more than one of the simple forms of trust in varying degree and combination – fixed, discretionary and unit trusts.

Advantages

The advantages of a hybrid trust are:

• flexibility of control and distribution of capital and income;

• negotiability - units can be redeemed and transferred;

• CGT Event E4 may not apply;

• CGT general 50% discount is accessible;

• negative gearing may be available; and

• asset protection advantages apply for non-fixed assets.

Disadvantages

The disadvantages of hybrid trusts are:

• difficulty in accessing small business tax concessions;

• complicates valuation and stamp duty issues;

• interest on borrowings may not be deductible;

• cannot access trust loss provisions that are available to fixed trusts; and

• cannot make a family trust election if more than one family is involved.

Legal considerations to note to access concessions

• small business net asset value test;

• requirement for CGT concession stakeholder;

• requirement for significant individual;

• fixed trust tests to access right to deduct current and prior year losses; and

• the test individual in relation to a family group.

See Hybrid trusts.

A superannuation fund trust deed is little different from any inter vivos trust deed. Its purpose is to provide retirement benefits to the members of the fund (the beneficiaries). It will receive concessional tax treatment if:

• it complies with the legislative requirements to bring it within the definition of a complying superannuation fund; and

• it complies with the investment and administration requirements to maintain that status.

Complying fund

A complying fund that is a self-managed superannuation fund must have fewer than five members and must observe formal requirements that include:

• who can be trustees of the fund;

• who can be directors of a trustee company;

• no remuneration to trustees; and

• an investment strategy.

Sole purpose test

The overriding principle is that the fund is established and maintained to provide benefits for a member's retirement or for the dependants of a deceased member. A non-complying fund is subject to substantial tax penalties, including being subject to tax at the top marginal tax rate, ie a 45% tax rate, from the start of the income year in which the fund becomes non-complying.

Control of the fund

Control resides in the members but when a member dies it is critical to have a procedure in place to ensure that the assets of the fund pass to the intended persons. This can be achieved by:

• provision in the deed itself;

• a binding death benefit nomination; and

• ensuring effective change of control of the trustee.

Transferring business assets to the fund

There is a general prohibition on transferring assets from a member to a fund. The major exception is business real property.

Benefits to consider include:

• income will thereafter be taxed at the superannuation concessional rate of 15%;

• CGT will be at a concessional rate or tax free after retirement; and

• the property transferred will obtain some asset protection status if the business itself gets into financial difficulty.

Borrowing money

A superannuation trustee may borrow money to purchase an asset in certain limited circumstances. Restrictions include:

• a particular borrowing must be for a single asset;

• the asset must be held on trust by a trustee, not being the superannuation trustee;

• third party rights against the trustee are limited to the asset only; and

• no other charge or encumbrance against the asset is permitted.

Payment of benefits

Payment of benefits is limited by the sole purpose test and the relevant legislation. In general terms these are:

• the deceased member’s estate;

• a spouse;

• children; and

• persons in an interdependency relationship with the deceased member.

See Superannuation.