In the past we have discussed the concept of testamentary trusts. A testamentary trust is simply a discretionary trust established pursuant to a will to hold an inheritance for certain nominated beneficiaries, and a broad range of potential beneficiaries.
This month let’s take that concept one step further, and talk about Super Proceeds Trusts (SPTs). A SPT is simply a trust established by will or by deed solely to receive superannuation proceeds on the death of a fund member.
Why establish a separate SPT?
If superannuation proceeds are received into a testamentary trust of which the potential beneficiaries most likely to benefit are a mix of death benefit (tax) dependants and non-tax dependants, tax will be payable on the taxable component of the death benefits.
Whereas, if the death benefits are received into a SPT ultimately for the benefit of tax dependants only (e.g. a spouse and young children), the superannuation proceeds can be received into the tax effective and protective environment of the SPT tax free.
Can you establish a SPT after death?
In limited circumstances, a SPT can be established after the death of a member, even where the deceased member has not incorporated a SPT into their will.
However, difficulties can arise if the superannuation fund trustee does not have discretion to pay superannuation proceeds to a SPT under their trust deed. Often there is no clear pathway to allow the trustee of a superannuation fund to distribute to a SPT unless the SPT has been established under a deceased’s will.
What can you do to ensure the SPT is effective?
It is important to ensure that appropriate nominations are in place to direct superannuation death benefits to the legal personal representative for distribution under the will, and if appropriate, to a separate SPT. Your client's wills incorporate a special clause to ‘quarantine’ superannuation proceeds for the benefit of tax dependants in a sub-trust of any testamentary trust created, ensuring that concessional tax treatment status is maintained. As always, ‘one size does not fit all’ and your clients should discuss the appropriate structure and strategy with their trusted legal adviser.
If this article has raised questions for you, the team at Partners Legal can help.
*A Matter of Trust was the second hit single on Billy Joel’s 1986 album The Bridge