The use of testamentary trusts in estate planning (particularly for clients with a reasonable level of income producing investments) is relatively standard practice. It is not uncommon in preparing the Will to pass all of the assets of the testator into one or more testamentary trusts.
The tax advantages of testamentary trusts are obvious: distributions to minors are not restricted to a $416 limit as applies to discretionary trusts, as well as the income splitting advantages of discretionary testamentary trusts.
Of greater importance are the asset protection advantages that a properly designed testamentary trust can provide.
What is often ignored, however, is the special position of main residences under the tax legislation.
A complete exemption from any capital gains subject to a number of conditions - the key condition is the disposing owner is an individual that has used the property as their main residence.
CGT on Deceased Estates
Example: Bruce and Fleur purchased their home in 1992 for a cost of $170,000.
The property is held as tenants in common.
Throughout the period of ownership they have used it exclusively as their main residence. It now has a value of $1,020,000, and after reduction by costs associated with sale, a capital gain of $800,000 is expected.
They are now 73 years of age and executed their Will which passes their interest in the home, together with other income producing assets, into a Testamentary Trust initially controlled by the survivor.
Shortly afterwards, Bruce passes away.
The general rule is that post-CGT assets (assets acquired on or after 20 September 1985) passing into a deceased estate are deemed to have been acquired at the cost base of the testator.
The Main Residence Exemption is extended if the property is sold within two years of death.
But what of the situation where the property passes to a testamentary trust? A ...