Tax Draft Fails to Address Testamentary Trusts Properly, Expert Says
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A recent draft of tax legislation fails to adequately address the implications for testamentary trusts (TTs) established under wills, possibly leading to unfair and arbitrary outcomes, according to tax expert Peter Burgess. The draft legislation concerns access to a concession under subsection 118-195 of the tax act.
Burgess argues that the draft legislation doesn’t account for the established legal principle that TTs are integral parts of a will, and should be interpreted with reference to the testator’s overall intentions. He contends that excluding rights arising through tts would unfairly penalize common estate planning practices.
Legislative Shortcomings
According to Burgess, if the intention of the legislation was to prevent tts from accessing the concession under subsection 118-195, the legislation needs to be more specific.he outlined two necessary changes:
- Specifically list TTs as ineligible for the concession, despite being established “under the deceased’s will.”
- Alternatively, specifically limit the concession to life estates and rights to occupy, excluding other arrangements established “under the deceased’s will.”
The current draft overlooks the consistent judicial approach of interpreting TT provisions using principles applicable to wills. Courts resolve ambiguities in TTs by referencing the testamentary intention, treating these trusts as components of the will rather than separate instruments.
Trustee Discretion and Testamentary Intent
Burgess further explains that the draft incorrectly assumes a separation between rights granted under the will and those arising under the TT. He emphasizes that trustee discretions and beneficiary entitlements within a TT are derived solely from the will itself. Even when a trustee exercises discretionary power, the legal authority originates from the will.
Excluding rights through TTs would create inconsistent treatment of estates with identical testamentary intent, solely based on the structural form chosen. This, Burgess argues, leads to arbitrary and unfair outcomes, penalizing legitimate estate planning strategies.
Modern Estate Planning and Holistic Structures
Burgess also points out that contemporary wills frequently incorporate TTs as part of a comprehensive estate planning structure. The TT is embedded within the overall testamentary scheme, and treating it as separate misrepresents its function and drafting intent.
He stresses that denying the concession doesn’t achieve any tax benefit,as the primary drivers for using TTs are estate planning and asset protection related concerns,such as:
- Blended families
- individuals at risk (due to mental or physical incapacity,substance abuse,gambling addiction,or business ownership)
- Orphaned children
- Individuals with serial monogamous relationships
- Grandparents providing for grandchildren
Lack of Guidance and Unanswered Questions
The draft also lacks guidance on rights to occupy granted to specifically named individuals under a TT,versus cases where the trustee has a general discretionary power. It also doesn’t address rights granted to identifiable class members who aren’t specifically named.
Burgess highlights that the draft fails to address key questions arising if taxpayers accept the Tax Office’s 2026 arguments regarding TTs and legislation that has existed for decades.These include:
- How should rights to occupy be treated where the willmaker died before 2026?
- How should rights to occupy be treated where the willmaker made their will before 2026 but is still alive and has testamentary capacity?
- How should rights to occupy be treated where the willmaker made their will before 2026 but is alive and has lost testamentary capacity?
These unanswered questions create uncertainty and potential for disputes, underscoring the need for a more comprehensive and thoughtful approach to the legislation.
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