An estate proceeds trust can operate a little like a post-death testamentary trust where a Will did not already include a testamentary trust, or where someone dies without a Will.
In some circumstances, an estate proceeds trust can be established by a beneficiary under a Will, for a minor child who may not have been named as a beneficiary under the Will but who would have been entitled to inherit if the deceased had died intestate.
With tax pressures continuing to grow, this kind of trust can be particularly valuable. The ability to create an estate proceeds trust arises under the federal Income Tax Assessment Act, and it may allow families to access concessional tax treatment for minor beneficiaries.
Take this example:
Sara’s husband, Tim, dies unexpectedly in an accident. They have two children of primary school age, Michael and Melissa. Sara and Tim had prepared Wills several years earlier, when the children were still very young. Their Wills were simple: each left everything to the other, and if they both died, their estates would be divided equally between the children.
Sara and Tim own a home with a mortgage, which they held jointly. As a result, Tim’s interest in the home passes automatically to Sara as the surviving joint owner and does not form part of his estate. They each have a car. They also have superannuation, and Tim owns a portfolio of shares. Sara works as a teacher, and Tim worked in corporate finance. Tim also had a life insurance policy worth $500,000.
Tim’s estate consists of his share portfolio, the proceeds of his life insurance policy, his employee entitlements, and his car. His superannuation is paid directly to Sara and does not form part of the estate. The house also falls outside the estate because it passes automatically to Sara as surviving joint tenant. Their bank accounts were jointly held as well, so those funds also pass to Sara outside the estate.
Sara uses the superannuation proceeds to pay down the mortgage and invests the balance for her own future. Tim’s estate, however, is still worth about $650,000.
At that point, Sara has a choice. She could simply inherit Tim’s estate under the terms of his Will. Alternatively, because she does not presently need those estate assets for herself, she could consider establishing estate proceeds trusts for Michael and Melissa to help secure their future.
If Tim had died intestate, Michael and Melissa may each have had an entitlement of about $166,000 under Queensland intestacy laws. (The position differs from State to State, so local advice is essential.)
Sara decides to establish an estate proceeds trust for each child and transfers $166,000 into each trust. Under the trust terms, the children would otherwise become entitled to their inheritance at 18, but Sara chooses to extend that age to 25.
The funds are invested, and each trust earns around $12,000 per year. That income is distributed for the benefit of Michael and Melissa and can be applied towards their education and other expenses. Because income from an estate proceeds trust may be taxed to minor beneficiaries on the same basis as adult taxpayers, rather than at the punitive rates that often apply to minors receiving trust distributions from an ordinary family trust, the tax outcome can be significantly better. If the children are under the tax-free threshold, little or no tax may be payable – testamentary trusts are not subject to the newly announced 30% income tax on family trusts.
In practical terms, this can create a considerable advantage for the family. Rather than Sara investing those funds in her own name and paying tax on the resulting income at her own marginal tax rate, the structure may allow the income to be used for the children’s benefit in a far more tax-effective way.
The result is that Sara is not only helping to preserve and grow part of Tim’s estate for Michael and Melissa, but may also be creating meaningful annual tax savings for the family.
If you find yourself in the devastating position of losing a spouse while your children are still young, it is important not to rush major estate decisions in the early stages of grief. In many cases, there is time to obtain advice and consider whether an estate proceeds trust might be appropriate. That breathing space can make all the difference in deciding what is best for you and your children.
If you would like further information, contact Jacqueline Brauman on 07 55382277.
