Centrelink attribution & testamentary trusts

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Do your clients with testamentary trusts have beneficiaries who are Centrelink administered benefit recipients? Have you discussed how these arrangements will operate and the impact they will have on the beneficiaries? Specialist advice may be needed.

The source and control tests for Centrelink attribution of a trust’s capital and income pose challenges for the operation of testamentary trusts.

In its Guide to Social Security Law, the Government makes the following statements:

Testamentary trusts activated after 31 March 2001
If a testamentary trust is activated by the death of the testator after 31 March 2001, the surviving partner will be attributed with the assets and income of the trust if:

  • the surviving partner has control of the trust (irrespective of whether the surviving partner is a beneficiary), or
  • an associate of the surviving partner has control of the trust, and the surviving partner is a potential beneficiary.

Explanation: If the surviving partner directly controls the trust, they can simply appoint themselves as a beneficiary or alternatively exert their powers to obtain benefit informally.

If an associate has control and the surviving partner is a potential beneficiary, a reasonable assessment of the situation is that the surviving partner will enjoy the benefits of the trust.

If the surviving partner (or an associate of the surviving partner) does not control the trust, attribution may be made, via the basic attribution rules, to the person(s) or members of a couple (1.1.M.120), whether of the same sex or a different sex, who have control of the trust.

Testamentary trusts with a commercial trustee
Some testamentary trusts will be established with a commercial trustee as the controller of the trust. In these cases the terms of the will need to be examined carefully to determine who the testator intended to benefit under the terms of the will.

Where the surviving partner is not a beneficiary of such a trust, attribution should be made to those who are specifically nominated as beneficiaries of the trust.

Generally such trusts are established to benefit specifically named individuals, with the direction in the will that the needs of a particular beneficiary or beneficiaries be considered.

It is not possible to attribute to a corporate trustee. In these types of cases it should be considered that the corporate trustee is administering the trust on behalf of the beneficiaries of the trust. Attribution will be made to those beneficiaries on whose behalf the trust is being administered.

In the case where neither the will maker nor the testamentary trustee is a Centrelink administered benefit recipient, it is most likely that the trust will be assessed on the basis of its pattern of distribution to beneficiaries or capital entitlement of beneficiaries.

Consideration for trust drafting
A trust where a primary beneficiary is the appointer or controller of the fund will be attributed to the beneficiary.
A trust where beneficiaries are not named but rather described (for example, ‘my children or grandchildren’) will most likely be assessed in accordance with who is in the class as the time the will maker dies.

A trust where there is discretion in the recognition of beneficiaries and their entitlements will mean that the trustee’s decisions rather than the will maker’s will drive the Centrelink consequences.

Centrelink will look for where beneficial interest lies in the administration of the trust. Where default capital rights lie with people other than Centrelink benefit recipients, expect detailed negotiation will be needed with Centrelink to agree the capital attribution pattern they will make on the trust.

Impacts on investment strategies for testamentary trustees
Capital attribution to a beneficiary will need to be assessed as the default capital that will be used to produce an investment return. Investment returns need to be considered in the light of the deemed income attributed to the beneficiary.

The collateral benefit loss a beneficiary may suffer needs to be considered when formulating a benefit attribution strategy. Recent experience has indicated some $70,000 per annum is needed to fully compensate someone who aged 55 is formerly fully dependent on public welfare, but through operation of her mother’s will, is forced out of that system.

Consider how s. 14A – D of the Trustee Act 1925 (NSW) affects the operation of the trust.

Some questions to consider asking the client and potential beneficiaries

  • Is capital expected to be used to support beneficiaries?
  • How large is the beneficiary pool? (In a recent matter 3 generations of a family were all alive and in the beneficiary pool. This brought up issues with Centrelink about on whose behalf capital of the trust was to be administered.)
  • How long is the trust intended to operate?
  • How is succession of the control of the trust to be handled?
  • How is the trustee to inform themselves of the situation needs and objectives of the beneficiaries?
  • Do the criteria in s.14C of the Trustee Act 1925 (NSW) (and its counterparts in other states) apply to the administration of the trust?
  • What is the impact of the distribution on the overall benefit levels received including health costs?
  • Is any Centrelink registered beneficiary in receipt of a non means tested benefit?

Some problems to avoid

  • Do not use testamentary trust precedents that have optional operation at the election of the beneficiary.
  • Do not appoint beneficiaries as appointers of any trust.
  • Do not erode the independence of trustee operations with beneficiary accountability if Centrelink attribution is intended to be constrained by the trust’s operation.

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