Superannuation is held in trust for its members until a condition of release is met. Death is a condition of release so the trustee can pay the super death benefits of the deceased out.
However, under the SIS Act the death benefits can only be paid to certain people who are classed as “SIS Act dependants” or to the estate:
A SIS Act Dependant includes
– A spouse (married or de facto)
– Any child
– Any person with whom the deceased had an interdependency relationship
Or to the estate:
– The deceased’s legal personal representative (executor or administrator of estate)
Who the benefits are paid to amount the above is determined solely by the trustee of the fund, subject to the trust deed or a valid binding death benefit nomination (BDBN).
Under trust law a trustee cannot be directed by others – a trustee’s discretion cannot be vetted. To get around this trust deeds can direct that the trustee must follow a written direction such as a BDBN.
Some funds only allow a 3 year BDBN which then lapses. If you don’t or cannot renew then the BDBN expires and won’t be effective.
Without a valid BDBN the trustee will decide where your super goes. If you have your super in an industry fund strangers will decide. If you have 2 children and one is a member of your SMSF then this child will decide where your super goes – to themselves only possibly.
People’s super balances are increasing and together with life insurance proceeds it wouldn’t be unusual for an average person’s super balance to be over $1mil on death.
Tip – make sure you understand where your super will go when you die and do something about it if there is a chance it could end up somewhere you don’t want it to go.
Originally posted at
When preparing a will for a client I had to ask the question ‘what if your wife remarried?’
He started yelling “I will kill the bastard, who is he! He doesn’t even exist yet, but I hate him” – jokingly of course. Then I said ‘what if your wife died first and you entered a new relationship” – oh that is different he said
But it is a serious question. Spouses often remarry or enter into new relationships and this will affect the family assets that you leave behind – their owns assets plus assets they inherited from you.
Homer and Marge are happily married and have a few assets in each name. Homer dies and leaves everything to Marge. Nothing to the children and nothing on trust.
A short time after the funeral Marge enters into a dalliance with neighbour and widower Ned – who is renting and has no assets. Pretty soon Ned is staying over 4 nights per week and then moves in.
Marge then dies of a heart attack during a vigorous love making session.
Her will leaves everything to her kids. But Ned has grown accustomed to living in style on the money Homer left Marge. Ned also likes the bed Homer purchased and wears Homer’s dressing gown in the morning. He also feeds Homer’s dog!
Ned makes a family provision claim. He is an eligible person as he is now a ‘spouse’ of Marge – or was on her death. His new girlfriend has moved into the house too.
Ned gets awarded 30% of Marge’s estate and they live happily ever after.
If Homer had considered this in his will he could have taken evasive action to prevent or reduce the financial effect of a new spouse on the family.
See Discussion at:
A client has advised they were ‘advised’, on an expensive course, to deposit their wage into a bank account of the trustee of a trust rather than into their own personal bank account..
This is for asset protection supposedly.
The idea is that the money never touches your account so it cannot fall into the hands of creditors.
In situations such as this, the trustee would be holding the money for you as bare trustee. There is no asset protection if you were to go bankrupt, die or go through a family law property settlement as it is still your money.
Furthermore, you have additional issues to consider such as what if the trustee
You would probably have worse asset protection issues.
If you did end up bankrupt the money could easily be clawed back.
Tip: Don’t do this without proper legal advice tailored to your situation.
The assets test can prevent someone from getting a full or part aged pension. A way around this might be to ‘double dip’ by spending up to reduce your assets. But that is wasteful. Spending $150k wastefully just to get an extra $10k doesn’t seem to be wise (yet people actually do this!).
A better way would be to upgrade the main residence. But this is also wasteful in terms of suffering stamp duty and other costs – you will lose roughly 10% of the value in selling one house to acquire another.
Another solution is to build a granny flat or second dwelling in the existing house. This will use up a chuck of cash, but also add value to the property.
As long as the granny flat is not rented out, or family stay there it will be treated as a part of the main residence and there will be no income taken into account.
This could help a person both get the pension as well as help family out by allowing them cheap accommodation.
Section 11A(1) of the Social Security Act
As of July 2019 the assets test for a single pensioner is $258,500 for a home owner. That is a single pensioner can have assets of $258,500 or less, other than their home, and still get the full pension.
Homer’s wife Marge just died and he is on a single pension. He has a $400,000 house on a large block as well as $400,000 in the bank. Homer could get a part pension only with his assets exceeding the assets test level.
His pension would be $12,836 per year
If he used $141,500 to build a granny flat the pension would jump to $22,509 pa
Using this great calculator: http://yourpension.com.au/APCalc/index.html#CalcForm
Homer uses $141,500 to build a granny flat in the back yard.
His pension increases by almost $10k per year.
He let’s his son Bart stay there and Bart helps around the home. Bart is now saving $300 per week on rent – so he is $15,000 per year better off.
If Bart moves out or if Homer ever needs more money he can always rent the granny flat out, but this would reduce his pension. If he rented the flat out for $300 pw he would get $15,000 pa rent plus $16,377 for the pension. $31,377 pa
He could also sell the property by about $180,000 more with the granny flat
So, all up building the granny flat has benefitted Homer in at least 4 ways:
There are several issues which can arise when a member of a trust loses their mental capacity.
Trustees – a trustee must have mental capacity to act as trustee. Where capacity is lost, and that person is a trustee they will automatically be removed as trustee. The terms of the trust deed will need to be read to determine what happens next. Often it will be up to the appointor to appoint a new trustee.
A trustee’s attorney cannot act in their place.
Homer is trustee of the Simpson Family Trust. Homer has appointed Barney as his attorney, under an enduring power of attorney document, if Homer where to lose capacity. Homer does lose capacity and can no longer act as trustee. However, Barney cannot act as trustee in Homer’s place.
Appointors – The appointor of the trust is the person who has the power to hire and fire the trustee. Also called the Principal or Controller in some deeds. If an Appointor loses capacity often, they are automatically removed as appointor – this is often built into the deed of the trust. If this happens a successor appointor appointed by the trust deed or a second deed may determine who the next appointor is. Where there is none there may be no appointor of the trust. Where the trustee and the appointor are the same person this could causes problems as the trust would be out of anyone’s control and an application may be needed to the Supreme Court for them to appoint a new trustee (very costly).
Where the appointor is not automatically removed then the appointor’s attorney may be able to exercise the power of appointment of the appointor.
Homer has made an enduring power of attorney appointing Barney to act on Homer’s behalf. Homer is the trustee and Appointor of the Simpson family trust. Homer loses capacity. Barney cannot use the POA to become trustee, but he can exercise Homer’s power as appointor of the trust to appoint himself as trustee.
Beneficiaries – a beneficiary is just a potential recipient of income and/or capital of the trust. A beneficiary losing capacity doesn’t change this, they can still receive income and/or capital from the trust.
Company Trustees – If a director of a company loses capacity often the company constitution will work to automatically remove that person as director of the company. If a shareholder loses capacity their attorney can act in their shoes by using the voting power and shareholders can vote in a new director. A director’s attorney cannot act as director but must be appointed director of the company first.
It is also possible for a company to have successor directors or substitute directors. These are appointed by the constitution of the company and need to be set up before capacity is lost.
Homer is the sole director of Simpson Nominees Pty Ltd which acts as trustee for the Simpson Family Trust. Homer has appointed Barney as his Attorney. Homer loses capacity. Barney cannot simply start acting as director of the company or operating its bank accounts etc. The shareholders of the company must appoint a new director. In this company Marg owns 50% of the shares and Homer owns 50% of the shares so a meeting of shareholders would need to be called a vote counted – Barney could vote on Homer’s behalf and Marg on her own behalf (the constitution would deal with situations where there is a 50/50 tie in voting).
However, it is later recalled that the constitution of the company was amended a few years ago so that if the current director lost capacity Bart Simpson would immediately be director – no further consent was required (however the shareholders could vote Bart out, depending on the constitution of the company)
When someone dies their assets pass via their will, or intestacy laws, without triggering CGT. The beneficiary’s cost base of the asset is generally the same as the cost base of the person who left it to them.
Homer dies and leaves some shares to Bart. Neither Bart nor the estate pay CGT on the shares passing through to Bart. If Bart sells, he would pay CGT on the shares and his cost base would be the same as Homer’s cost base. So if Homer bought them for $100,000 and they were worth $500,000 on Homer’s death and Bart held them for 10 years and then sold them for $1mil, Bart’s cost base would be $100,000 and he would have made a capital gain of $900,000 (the tax would be about $210,000).
But if the shares are not sold but hung onto and the passed on via the beneficiary’s will, there will still be no CGT payable until they are sold.
Bart inherits Homer’s shares and then Bart dies. Bart some Bartyboy inherits the shares. If Bartyboy sells the shares his cost base will be $100,000.
So, the way to avoid CGT is for each generation of the family to keep the shares without selling. Selling the assets inherited is like killing the goose that lays the golden eggs.
Shares could be sold and later the proceeds reinvested, but each time they are sold up to 25% of the value is lost in CGT. Therefore, not selling for hundreds of years could allow for some massive compounding.
But what about the inflexibility of income distribution? One drawback of inheriting shares is that there is little opportunity to divert income to a spouse, and/or children unless they are held in a discretionary trust. Holding assets in a discretionary trust means those assets cannot pass via a person’s will. Trusts generally must vest every 80 years so that means CGT would be triggered every 80 years time, wiping out about 25% of the value of the assets.
However, there is a way around this too.
In this thread,
Tax Tip 194: Transferring a Property from a Testamentary Trust to a Beneficiary Without CGT https://www.propertychat.com.au/community/threads/tax-tip-194-transferring-a-property-from-a-testamentary-trust-to-a-beneficiary-without-cgt.38844/
I showed how it is possible to transfer assets out of a testamentary discretionary trust (TDT) to a beneficiary without triggering CGT.
Therefore, the solution to avoid paying tax is to set up a TDT in the will. Upon the death of the testator the assets will pass to one of more trustees of a TDT. Income from the shares can be streamed to the primary beneficiary and their spouses and children with real tax advantages (as well as asset protection).
When that primary beneficiary is about to die, or possibly even after their death, the assets of the trust, such as shares are transferred into their estate and then out into a new TDT. Their children will control this trust and can stream the income out and then upon their death, the same thing can happen.
The result is hundreds of years of compounding of the capital based with very little tax paid on the dividends in between – in theory, and assuming current laws allowing this will not change.
Homer is fit and healthy and writes his will incorporating a TDT for each child. Homer buys some shares and keeps compounding the returns so that at his death he has a large amount paying good dividends. His will leaves 1/3 to each of 3 TDTs each controlled by one of his children.
Bart controls one TDT and keeps the shares in it with the income being streamed to his children and spouse largely tax free. Bart keeps investing in shares outside the TDT (as injecting money into it won’t result in tax savings).
Bart comes down with a diagnosis of cancer and has 4 weeks to live. Dr Hibbert tells him the bad news and says sorry it has taken you 3 weeks to get an appointment to see me, you only have 1 week left.
Bart causes the assets to be distributed from the TDT to himself, without triggering CGT.
Bart dies a few days later.
Bart’s estate is now much larger than when Homer died.
Bart’s will also has a TDT and he goes for the same strategy.
Bartboy junior continues the tradition and does the same thing as his dad, Bart.
Bartyboy junior dies at a rave party, without children. But luckily his wills sets up a TDT with his siblings taking over the tradition.
This strategy can work well with shares as there is no stamp duty on the transfer of shares, but with property passing from a trustee to a individual is it likely to trigger duty in many states – perhaps exemptions might apply in VIC and WA in certain situations.
The best thing though is if one generation decides they want to sell up and abandon the tradition, then there will still be tax savings by utilising a Testamentary Discretionary Trust.
I often see discretionary trust deeds which nominate the next appointor, upon the death of the current appointor, to be the Legal Personal Representative (LPR) of the last appointor upon their death. On death the LPR of the deceased is the executor or administrator of the will.
This is a bad idea!
Homer has set up a trust without getting legal advice. Homer is the sole appointor of the trust and there has been no thought given to what happens after his death. The deed is worded in such a way that the LPR of Homer will become the next appointor. The trust holds assets of approx. $2mil when Homer dies.
What could happen?
Solution – seek legal advice about appointing a successor appointor now, via a separate deed. If the trust deed doesn’t allow this, seek legal advice on having the deed amended to allow it.
Keep any clause relating to the next appointor being nominated in the will as a back up, and avoid having the LPR being the next appointor.
Testamentary Discretionary Trusts (TDT) are the best sort of trust out there, but someone has to die for them to come into existence. So, they are relatively rare. Also, the capital of the trust has to come from the deceased for the extra tax benefits to work (excepted trust income).
So, I cringe when clients approach me wanting to wind up a TDT that their parent has left them in control of.
Their idea usually goes something like this. I have a $1mil loan on my main residence and the trust holds $1mil worth of assets. If I wind up the trust, I can pay off my home loan and save interest.
It is a valid point, but once a TDT is closed it can’t be reopened again, and even if kept open new capital can be injected, but income generated from it would not qualify as except trust income and would not get the concessional tax treatment in the hands of children.
There is a simple way around this though, and that is to get the trustee to make you an interest free loan.
Bart’s dad Homer dies and leaves $1mil to a trustee of a TDT set up under his will. Bart has a $1mil home loan so winds up the trust and pays off the loan.
Lisa is in the same position, but she controls a separate, but identical trust. Lisa gets the trustee to lend her $1mil interest free which she uses to pay off her loan. She has not no deductible debt now. So, she uses the $3,000 she was paying the bank each month to pay back the trust.
The trust now has money with which to invest. The income from these investments can go to Lisa’s children tax free – because they can each earn $20,000 pa tax free so it will be ages before the trust’s income is more than this.
Meanwhile Bart is making the same investments as Lisa, but he receives the income himself and is taxed at 47%
Over the next 15 years or so Lisa would have probably repaid the full $1mil back to the trust so it is now generating about $40,000 per year in income which comes out tax free to her kids.
Once the kids start working, she will have to reassess where the income goes, but until then there are huge savings.
Tip – Don’t wind up a testamentary trust without careful consideration and legal advice.
Note that this would also give great asset protection as well.
Get some legal advice before trying this.
Some people want to help their elderly parent(s) purchase property. This might be the parents moving to a more suitable property or the parents becoming owners instead of renting.
Helping the parents into a property can also help the children too, because they may potentially inherit the property at a later date and there can be great tax concessional along the way.
There are basically 3 main ways an adult child could help a parent into a property:
b. loan – at interest or interest free
c. purchasing part of the property.
There are various estate planning consequences to each of these and also practical consequences.
Some things to consider:
An example of how It could work
Bart and Lisa are adults with one parent left – Homer. Homer lost his house years ago and is renting. Bart and Lisa each have their own homes fully paid off and some cash in the offset accounts to their separately owned investment properties.
Bart finds a property with development potential. It is just around the corner from where Homer lives in his rented flat. Bart is going to purchase the property and is deciding what entity to put it in when he has an idea.
The property purchase price is $500,000. He has enough cash to pay for it so he could just buy it outright, but since his dad is not getting a main residence exemption for CGT Bart talks to Homer, his dad, and they decide to buy it in Homer’s name.
Homer signs the contract and Bart lends him the 10% deposit with a promise to lend him the rest for settlement.
Bart then realises that if Homer dies his sister Lisa will end up with half the property. So to make things fairer he talks to Lisa and gives her 2 options
Bart and Lisa decide to ‘go 50/50’ and each lend Homer $250,000 and Homer settles on the property. It is a 5 year interest free loan which they intend to renew each 5 years.
Bart arranges various approvals and the property is now worth $1mil when Homer dies 4 years later.
Under the terms of the will of Homer 50% of his assets would go into each of 2 testamentary discretionary trusts with one controlled by Bart and one controlled by Lisa.
They each now have 50% of an additional property which would be could be sold tax free or held onto with a cost base of $1mil. There has been no land tax along the way because this was Homer’s main residence and they have each gained further tax deductions by using cash in their offset accounts.
Furthermore, any income generated from the property from that point could be streamed to their minor children, as beneficiaries of the trust, with each child getting around $20,000 without having to pay tax.
Just before Homer’s death they also forgave the loans they made him – so this meant that an extra $500,000 was driven into the testamentary discretionary trust so they could generate even more tax free income.
Legal Tip 208: Helping an Elderly Parent Buy a new property https://www.propertychat.com.au/community/threads/legal-tip-208-helping-an-elderly-parent-buy-a-new-property.39377/
Written by Terryw Lawyer at www.structuringlawyers.com.au
For a trust to exist there must be at least one beneficiary, but there is no legal requirement that the beneficiary must be alive at the date the trust is created (as long as there are one or more other beneficiaries that are alive).
People not yet in existence can be beneficiaries by their relationship to someone else.
Homer may set up a trust under his will for his children and grandchildren. His children are the Primary Beneficiaries, they are named or better yet, not named but listed by Homer as “my children” – just in case he has more kids after making the will. The Secondary Beneficiaries would include ‘my grandchildren’
Homer dies with all of his children being about 12 years old or less with no grandchildren, but 20 years later when Homer’s son Bart has a son, that son will automatically be a beneficiary of the trust set up 20 years earlier because he is a grandson of Homer.
This has important estate planning and tax consequences as the grandchildren could be earning $20k per year and not paying any tax.
Under s118-150 ITAA97 a person can claim the main residence CGT exemption for up to 4 years prior to occupation of a house being constructed once it is completed – if they live there for at least 3 months and do not claim another property during this time.
Tax Tip 99: Vacant Land and the CGT Exemption https://propertychat.com.au/community/threads/tax-tip-99-vacant-land-and-the-cgt-exemption.9196/
Tax Tip 107: CGT exemption not stay in newly constructed house for 3 months https://propertychat.com.au/community/threads/tax-tip-107-cgt-exemption-not-stay-in-newly-constructed-house-for-3-months.9696/
What would happen if the owner died during construction and could not live there for 3 months?
Luckily there is a concession which covers this scenario and can be found at s 118-155 ITAA97. The surviving joint owner of a joint tenancy or the LPR of the estate can choose to apply the main residence rule for the shorter of 4 years before the death or when the individual acquired the land.
Homer and Marg are renting and buy land with the intention to build on it. The land has skyrocketed in price, but after 3 years they still have not done anything with it. They then realise time is running out so enter into a contract with a builder. Homer suddenly dies from radiation poisoning. If Marg is a joint tenant owner she will become sole owner bypassing the will. This legislation allows Marg to claim the main residence exemption on the whole property from the date it was acquired as long as she moves in within the 4 year period from purchase contracts.
If Barney was Homer’s executor and they held it as tenants in common it could still be CGT exempt as long as it is completed in time. In this case Barney doesn’t need to move into the property for the exemption to apply but it can be passed via Homer’s will as if it was Homer’s main residence for the 4 years prior to his death.
I would like to tell you, but it is a secret.
These are trusts, usually set up under a will, where property is left to a person on an undisclosed trust for someone else.
Homer dies and leaves $100,000 cash for his mate Barney, but leaves it to Ned on the understanding that Ned gives Barney $100 per week for the next 100 weeks (so Barney doesn’t waste it all in the first week).
Barney is not recorded as the beneficiary under the will.
Naturally there may be problems with enforcing these trusts as no one may know about them other than the trustee. The beneficiary may realise or find out though but even then they will probably have difficulty proving the trust if there is no written evidence. As such you really must trust your trustee when doing this.
There is also the half secret trust, and that is when the trust is partially disclosed in the will. For example the will might say that Ned is the trustee (using above example) but not who the beneficiary is or the terms of the trust. This might have a higher chance of being enforced as it is evident that there is a trust, but not who for and for how long and how much.
Written by Terryw who is a lawyer at www.StructuringLawyers.com.au
Trusts are generally considered the greatest British invention, (the sandwich comes in second), and Testamentary Discretionary Trusts (TDTs) are the best of the best.
The main benefit of a TDT is the ability to get income into the hands of children and have them taxed as adults.
Another main benefit of TDTs is the ability to transfer a property owned by the trustee of the trust to that of a beneficiary of the trust without triggering CGT. This means an inspecie transfer of assets is possible without CGT.
Homer dies and leaves his property portfolio indirectly to his children by establishing 3 separate TDTs in his will. Bart’s trust will hold 3 properties, as will 2 more trusts controlled by Bart’s sisters.
Bart has 5 children, so is able to distribute the $100,000 in rental income to the children tax free each year.
After a while the kids grow up and start working so any further distributions will result in tax being payable at high rates. Bart decides to reduce the tax by moving into the most expensive property and living there rent free. Then he realises that the property is subject to CGT as it is held by a trustee and the main residence exemption won’t apply.
Bart decides to use the ATO’s concession and transfer the property from the trustee to himself as a beneficiary under the will.
He gets a private ruling first and this confirms the Commissioner will not treat this as a disposal for CGT purposes because it is a transfer from a deceased estate to a beneficiary.
Note however that this is not law, but a concessional treatment by the Commissioner as stated in Paragraph 2 of PS LA 2003/12 https://www.ato.gov.au/law/view/document?docid=PSR/PS200312/NAT/ATO/00001
“… the Commissioner will not depart from the ATO’s long-standing administrative practice of treating the trustee of a testamentary trust in the same way that a legal personal representative is treated for the purposes of Division 128 of the ITAA 1997, in particular subsection 128-15(3).”
See also PBR 99991231235958 – Questions 1 and 2
also PBR 1012603789935
There is no time limit as to how long you can carry forward losses – whether income losses or capital losses, however they will be lost at death (a loss lost!). So, it makes sense that you should try to use up losses as early as possible. This is generally not too hard with income losses as these are easily eaten up the next financial year with more income being earned.
Using up capital losses tends to be more difficult though as a capital loss can only be used up by a capital gain – not general income.
Note that there are complex rules regarding companies and trusts in carrying forward losses.
Homer invested money in a business he ran which failed. He lost $200,000 and has a $200,000 capital loss which he has been carrying forward for 9 years now. Homer would love to use this loss up, but the trouble is he has no other asset he could sell to offset the loss.
If Homer owned shares for example he could sell shares with a $200,000 capital gain and not have to pay any tax.
But losing his money has meant that Homer doesn’t have any capital to invest with.
However, Homer’s daughter Lisa knows a thing or 2 so sets up a discretionary trust to hold investments. It could be possible that in future a gain from the trust could be distributed to Homer and his loss could offset this so that no tax is payable.
Discuss this topic here