How does section 63 of the Duties Act 1997 (NSW) affect distribution of assets from an estate?
Section 63 allows assets (primarily relevant for real estate and shares) to be transferred to beneficiaries in specie for $50 stamp duty provided the distribution is "in conformity with the Will."
Questions can arise where the Will creates testamentary trusts and in lieu of a piece of real estate passing to a testamentary trust, a beneficiary may prefer to have that real estate passed to themselves personally.
Cherry Picking Exercise
When we draft a Will with testamentary trusts, we usually include what we call a "cherry picking clause" where, provided the beneficiary does not control the Executor and have power to direct the Executor to distribute to himself or herself, but rather that the power is with the Executor who elects 'with the consent of the beneficiary' to make such distribution, then, $50 stamp duty is preserved. In our view, the Executor's discretion to effect the transfer to the individual beneficiary is still 'in conformity with the Will'.
Where testamentary trusts are created, the trust is established under the Will, and it is important that the election is made immediately so that the asset is not passed to the beneficiary who then discerns that he would rather that it be placed in the testamentary trust: that would effect a sub-sale and ad valorem stamp duty (according to value of the asset) would be imposed.
The cherry picking exercise is distinguishable from the exercise of a power of appointment (for example, by the Executor) because, the "cherry picking" is "in conformity with the Will".
Who can be the trustee of the testamentary trusts?
Our usual drafting nominates the principal beneficiary also as the trustee but some practitioners prefer the Executors to incorporate a corporate trustee before transitioning assets into the testamentary trust. In that way, $50 stamp duty is still available.
Why have testamentary trusts?
Testamentary trusts are commonly used where parents are nervous about the marriage of adult children and nominate a trust entity as beneficiary rather than their son or daughter. Under Family Law assets inherited by a son or daughter are taken into account when a property settlement between separating spouses is being determined. A testamentary trust gives some quarantining of those assets because the son or daughter can honestly say they have no absolute entitlement to the assets of the trust. This argument is less sturdy if the son or daughter is the trustee because they are controlling the assets of the trust and this is another reason why as a rule of practice, it may be wise for the trustee to be an independent company (provided the son or daughter do not control that company).
A trust gives greater protection than if the assets were automatically inherited because then party to the marriage would have an absolute entitlement
This does not preclude the Family Court from considering the trends of distribution through the testamentary trust in preceding years noting if it was apparent that the relevant party had regularly received distributions from the trust, the court would assume that that practice would continue into the future and therefore would allocate other assets of the marriage more in favour of the non-beneficiary spouse than in favour of the trust beneficiary.
Tax consequences on testamentary trusts
Because a testamentary trust is a special trust, any property asset held in the trust occupied as the family home of the adult beneficiary after the two year moratorium period from date of death, would begin to attract land tax without the threshold exemption, and capital gains tax on a disposition into the future. Land tax can be avoided if a tiny percentage of the title is held by the person occupying the property as their home notwithstanding that the majority of the ownership is in the trust.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.