Can a Trust Be a Beneficiary Under Your Will?
If you’re thinking about using a trust in your estate planning, you’ve probably heard of testamentary trusts – trusts created upon your death.
Testamentary trusts are complex, though, and it might seem easier to make an existing trust a beneficiary of your Will. In this article, we’ll explore the pros and cons of gifts to existing trusts, and evaluate whether they’re a better option than testamentary trusts.
Definition of Testamentary Trust
A testamentary trust is a discretionary trust created under your Will. It comes into existence when you die, and its terms are provided by a schedule incorporated into your Will.
As a discretionary trust, the trustee(s) decide which trust beneficiaries get what distributions and when.
Definition of an Inter Vivos Trust
An inter vivos trust is a trust created during a person’s lifetime. (‘Inter vivos’ means ‘between the living’ in Latin, which is why inter vivos trusts are sometimes referred to as ‘living trusts’.)
Inter vivos trusts can be discretionary trusts (often called family trusts) or fixed trusts. The terms of an inter vivos trust are contained in the trust deed.
Can an Existing Trust be a Beneficiary in my Will?
Yes! A person can leave assets under their Will to the trustees of a trust already in existence, such as a family trust or a unit trust. These are collectively known as ‘inter vivos trusts’. For a gift under a Will to a trust to be valid, it must comply with s 33R of the Succession Act 1981 (Qld).
Section 33R states that a trust or power (created by a Will) to dispose of property is not void if the same power or trust could be made by the testator during their lifetime. It must be clear who or what class of people are intended to benefit from the trust in question.
What Are the Advantages of Leaving a Gift to an Inter Vivos Trust?
If a testator has existing trusts created for specific purposes, it may be advantageous to use the existing trusts.
A gift to an inter vivos trust may also be advantageous if there are concerns regarding the testator’s mental capacity to understand a complex Will incorporating testamentary trusts, but the benefits of a trust are nonetheless desirable. In this case, a gift to an existing trust is a much shorter and more straightforward Will to understand.
What Are the Disadvantages of Leaving a Gift to an Inter Vivos Trust?
The main disadvantage of using an inter vivos trust is the risk that the trust deed may not allow for the testator’s wishes to be effectively carried out. For example, there may be provisions in the trust deed that prevent distributions being made to certain beneficiaries or only allow certain distributions with the consent of a third party.
As such, it’s important that you ask an experienced estate planning lawyer to review the trust deed for any such restrictions. In many cases, these issues can be fixed while the testator is still alive so that their testamentary intentions are not defeated.
Unless the Will is prepared just before the testator’s death, there are also time-related risks that may arise. Trusts in Australia have a maximum life of 80 years (except in South Australia), so, if the trust has already been operating for a number of years, it may only exist for a short time after the testator’s death (or may have already come to an end).
Additionally, after the signing of the Will, the structure of the trust may change, making it no longer appropriate to receive the gift (for example, the trust may have exposed itself to risk, or the control of the trust or the beneficiary classes may have changed).
Another disadvantage is that gifts made under a Will to an existing trust are not eligible to take advantage of the minor beneficiary tax concessions found in s 102AG of the Income Tax Assessment Act 1936 (Cth).
Section 102AG states that income from a ‘testamentary’ trust for minor beneficiaries (under 18 years of age) is ‘excepted trust income’, and those distributions are taxed at the ordinary adult tax rates with a tax-free threshold of $18,200. Distributions to minors from an inter vivos trust are taxed at ordinary child tax rates with a tax-free threshold of only $416.
Keep in mind that you need to be careful about breaching the anti-avoidance rules in s 102AG.
Seek Financial and Taxation Advice
Every situation is different, so talk to your tax professional before making a gift under your Will to an existing trust. There may be financial and tax implications that you aren’t aware of.
Summary
The potential disadvantages of using a Will to gift assets to an inter vivos trust usually outweigh the potential advantages.
In most instances, it’s preferable to simply draft a testamentary trust into the terms of a testator’s Will. This option:
- allows the trust to be tailored in accordance with the testator’s wishes
- means the trust is unaffected by factors that could impact an existing trust
- eliminates concerns regarding early vesting of an existing trust
- enables minor beneficiaries to take advantage of s 102AG tax benefits (which are not available to minor beneficiaries of inter vivos trusts).
If you’re thinking about protecting your legacy with a testamentary trust, book a consultation with one of our experienced succession planning solicitors. We’ll provide advice specific to your situation – including whether making an inter vivos trust a beneficiary, or creating a testamentary trust is the best option for you.
The content of this page is for information only. The content does not constitute legal advice and should not be relied upon as such. You should obtain advice that is specific to your circumstances before taking any action.
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