22 January 2016

All in the family

Wills, Powers, Estates & Family Provision Claims
New South Wales

Asked

Hi, I am preparing a will for my client. My client wishes to leave her residence and funds for the use of her extended family as determined by her executors. I have advised her that she cannot delegate her testamentary responsibilities.

I intend to create a discretionary trust in her will. However it appears it is not possible to avoid a land tax liability this way.

Would the creation of a life estate in favour of a class of people through the mechanism of establishing a fund for that purpose be a better mechanism than the discretionary trust? And would it avoid the land tax liability?

With thanks.

Answered

A discretionary trust pays land tax on the whole of the unimproved capital value of a property - not the value exceeding the threshold allowance, which is $482,000 for 2016. It also does not receive the main residence exemption for capital gains tax.

In general terms life estates create many issues between the life tenants and the remaindermen and are not recommended. For land tax purposes see s 20 of the Land Tax Management Act 1956. The identity of the entity owning the property determines whether the threshold is available. See tax ruling TR 2006/14 for the capital gains tax rules for life tenancies and remainder interests.

The investment flexibility and control the client seeks to vest in a trustee through a testamentary discretionary trust comes at the price of the land tax impost but it is a far better solution than the creation of life estates, particularly when there would be several life tenants all presumably having differing views about their rights and obligations.

The great benefit of the testamentary discretionary trust is that income paid to infant beneficiaries is taxed at normal marginal rates allowing a tax free threshold of $18,200 for each of them. This may well compensate for the loss of the land tax threshold benefit of approximately $8,000 annually.

Regards

Mentor