Trust Deed Register of Australia ,NZ & South Pacific

Priorities for Protective Trusts

Established for vulnerable people, typically priorities (in order) will be:

·         Accommodation & support services

·         Other essential needs, eg food, clothing, education

·         Quality of life benefits, eg entertainment, recreation

·         Any surplus income usually allocated for future needs

·         Needs of residual beneficiary not usually a priority

Note: Relying on “prudent person” rule not sufficient.  For planning reasons most protective trusts are “non-fixed” –   Alternatives are:

Ø  Split Fixed

Ø  Bare

Ø  Defeasible

Priorities for Protective Trusts

There are two extremes for the terms of a trust - the flexible, largely non-accountable responsibilities of the trustee of a family discretionary trust and the prudent person rules that apply in default to the trustee of a trust under State and Territory laws.

The terms of trust for a protective trust for a vulnerable person are usually relatively close to those trusts that are subject to the default “prudent person” rule that applies to all trusts to the extent that the terms of trust are not defined. (The prudent person rule usually applies to all holders of enduring powers of attorney and to trusts where the State or Territory authority has appointed an administrator for a “represented” person.)

Where a protective trust is being established by a Will or Deed, rather than just relying on the prudent person rule, it is recommended that the following issues be specifically addressed in the terms of a protective trust:

• Accommodation and support services (finding suitable accommodation can be a major difficulty, but can make an enormous difference to a vulnerable person’s quality of life; similarly support services can be a major on-going expense for many vulnerable people);

• Quality of life (many professional trustees have been and are loathe to spend money on recreation and entertainment without specific authorisation under the terms of trust - it is often usual for the trustee to be given examples of what sort of quality of life expenditure can and should be incurred if surplus funds are available, eg recreation, holidays, travel);

• The rights of residual beneficiaries who usually only come into play on the death of the principal beneficiary, but in the absence of suitable provisions, can pressure or influence the trustee to manage the trust with their interests in mind. The residual beneficiaries can seek to invoke the prudent person rule (unless it is specifically excluded).

Major Reasons why a non-fixed protective trust option might be taken up:

• To provide income and benefits (and, unlike some of the other types of protective trusts, the trustee has the discretion to use the trust capital as well) for a vulnerable child or other relative.

• Preservation of capital base - the Willmaker may wish to ensure that, unless needed; the capital is held in reserve and not dissipated or passed by default to unsuitable next-of-kin, eg a child’s estranged natural father.

Trustee

The trustee is usually the executor of the estate and is not usually subject to a power of appointment by a third party.

Income, Losses, Loans and Pension Benefits

The vulnerable beneficiary (or on their behalf any person appointed as administrator) is taxed on all trust income spent on or allocated or paid to or for the beneficiary, with credit for any tax already paid, eg dividend franking

credits. Both income and capital are included in the vulnerable beneficiary’s means test calculations.

Capital Profits

If trust assets that were owned by the Willmaker pass to the residual beneficiary, no taxable CGT event occurs until the residual beneficiary disposes of them. Other assets taxed as a capital gain on sale or distribution (but with a 50% discount). The choice of who receives the capital gain is at the trustee’s discretion.

Alternatives to this Trust

Means tested pension eligibility issues may make it worth considering a “spilt fixed” or “absolute”, rather than a “non-fixed”, trust, although this would mean that the capital would need to be fully preserved. In the case of split fixed trusts, the capital could not be spent on the needs of the vulnerable beneficiary. In the case of absolute trusts, the capital forms part of the vulnerable beneficiary personal assets and could pass to unsatisfactory next-of kin or away from the control of the preferred trustees.

Protective Trusts

Vulnerable Beneficiaries - The Ten “Cs”

·         Capacity

·         Cash flow (Funding)

·         Challenges

·         Change

·         Circumstances – Beneficiary

·         Circumstances -Estate Planner (People setting up the Trust)

·         Concessions – Tax Rules , Centrelink Entitlements    (Change all the time )

·         Conflict of Interest

·         Constraints

·         Control of Funds

Vulnerable Beneficiaries

The importance of estate planning increases if an intended beneficiary is vulnerable to undue influence or lacks rational decision making capacity, eg the beneficiary is:

• Intellectually disabled (the administration of the beneficiary’s personal assets may be subject to administrator appointed by a State or Territory regulator);
• Addicted to heroin or other drugs of addiction;
• Unable to handle personal finances because of gambling or other problems;
• Spendthrift and likely to waste any inheritance of which they gain absolute control;
• Bankrupt, eg because of personal guarantees they have given;
• Too young to be suddenly managing a large sum of money (higher age barriers than 18 years can be set out in a Will or in the terms of a non-commutable pension); or
• Likely to be unduly pressured by partners, family members or other people.

Structuring of Benefits

To ensure that an intended beneficiary benefits notwithstanding vulnerability, ownership of assets to be inherited on death (including superannuation and life insurance) need to be structured so that the benefits are paid to in a

form that best meets the present and likely needs of the vulnerable beneficiary’s:

·         As a non-commutable reversionary, allocated or other pension or annuity;

·         As a fixed or non-fixed life interest;

·         To a crisis protective trust (lasting the duration of the bankruptcy or other crisis);

·         To a fixed or non-fixed capital reserved trust; or

·         To a fixed or non-fixed protective trust.

Major Reasons why a split fixed protective trust option might be taken up:

·         To provide income and benefits (but not capital) for vulnerable child or other relative.

·         To minimise the impact of the vulnerable beneficiary’s pension eligibility – Centrelink’s assets test applies to the value of the income stream.

·         Preservation of capital base - the Willmaker may wish to ensure that the capital is not dissipated or passed by default to unsuitable next-of-kin, eg a child’s estranged natural father.

Trustee

The trustee is usually the executor of the estate and is not usually subject to a power of appointment by a third party.

Income, Losses, Loans and Pension Benefits

Vulnerable beneficiary (or on their behalf any person appointed as administrator) is taxed on all trust income spent on or allocated or paid to or for the beneficiary, with credit for any tax already paid, eg dividend franking credits.

Limited restrictions apply to losses, loans or benefits. Income, but not capital, is included in the vulnerable beneficiary’s means test calculations.

Capital Profits

If assets that were owned by the Willmaker are eventually distributed to capital beneficiaries, no taxable CGT event occurs until the residual beneficiaries dispose of them. Otherwise taxed as a capital gain by the capital

beneficiary (but with a 50% discount), notwithstanding that the capital gain may not benefit the beneficiary until some stage in the future. The trustee is usually given the power to advance capital to meet capital gains tax liabilities.

Alternatives to this Trust

If the inability to access capital to meet the vulnerable beneficiary’s needs or to distribute income to any dependants of the vulnerable beneficiary or to accumulate income is an issue, a “non-fixed” or “absolute” protective trust might be preferred.

Asset & Property Protection – APP – Special  Provisions

A.P.P.  usually ensure that an Estate Plan and Relevant Wills for people with Disabilities include measures to (1) Preserve a beneficiaries entitlements to Centrelink and other Government sourced support & tax concessions (2) Ensure that there is never a situation where there is no one available to be an effective and trustworthy Trustee (App Wills have a Testamentary Referree provision to enable suitable replacement Trustees to be appointed and found if no suitable trustworthy relatives or friends are available (3) Ensure that Trustees cannot abuse their power without the possibility of effective review (APP Wills include a provision for a Testamentary Referree to activate appropriate Alternative Dispute Resolution short of going to court such as Appointment of Conciliators and Arbitrators etc).

Should you require advice or discussion, leading to the putting into place of a Comprehensive Estate Plan incorporating the above; please make contact with us for an appointment.

Alex Tees

Solicitor, Lawyer

Estate Planning Adviser

Asset & Property Protection Lawyers

A Business Unit of www.legalexchange.com.au

Ph:                        (02) 92813230 / 9003 9744

Mobile:                 0409 813 622

After hours:         (02) 9387 4836

Email:                   atees@bigpond.com