Gifting Trust Deed – ‘death bed declaration’
What is a Gifting Trust Deed – ‘death bed declaration’?
Here is an example of a ‘trust’. When your son is born you open a bank account in trust for him. You are the trustee. The trust’s beneficiary is your son. You hold the bank account in trust for your son. Your name appears on the bank account merely as the ‘legal owner’. The ‘true’ or ‘beneficial’ owner is your son.
Does the beneficiary pay the income tax?
The Bare Trust assets always belong to the beneficiary. Therefore, income from the trust assets is linked back to the beneficiary. See section 106-50 Income Tax Assessment Act 1997. For example, each year, the rental income is declared in the beneficiaries’ income tax return. Not the trustee’s tax return.
It is your son that pays tax on the bank account interest. (Children, in fact, any person under 18, suffer a penalty tax rate.)
At 18 years of age, the child can end the Bare Trust
When your son is 18 years of age he can remove you as trustee – and instead place you with another trustee or himself as the ‘legal owner’.
Beneficiaries of trusts are protected. For example, if you, as the trustee, go bankrupt or get a divorce then the trust asset, being the bank account, is not lost. The bank account is preserved for your son, who, as beneficiary, is the ‘true’ owner of the asset. The courts and the ATO ‘look through’ the trust to see who the ‘true’ owner of the assets are. In this case the ‘true’ owner is your son – not you.
Most people when they own an asset hold both the legal and beneficial interest in the asset. There is no trust if you hold both the legal and beneficial ownership. In contrast, in a trust the legal and beneficial interests are held by different people. One person is the legal owner – trustee. The other person is the beneficial owner – beneficiary. A trust automatically exists when you separate the ‘legal’ and ‘beneficial’ ownership.
If your son, at 18, removes you at trustee and puts himself in as the legal owner, then the trust is finished – it is extinguished. This is because your son now holds both the ‘legal’ title and ‘beneficial’ interest. The split of the ownership has gone and the trust relationship no longer exists.
The trust asset can be anything, including real estate, shares, artwork, cars, bank accounts and cash.
The three most common trusts in Australia, that are not Bare Trusts:
- Family Trust (Family Discretionary Trust)
- Unit Trust
- Self-Managed Super Fund
The trustees of these 3 trusts all have responsibilities to actively manage the assets in the trust.
Bare Trust vs other Australian Trusts
Bare Trusts are different. They are often referred to as ‘naked trusts’.
A bare trust is a trust in which the beneficiary has a right to both income and capital. But more importantly, the beneficiary may call for both to be paid into their own name.
The trustee, in a bare trust, has no responsibilities or powers. They act only on the beneficiary’s instructions.
Under a Bare Trust, the trustee has no active duties to perform. The trustee’s duty is to transfer the legal title of the property to the beneficiaries. This is when instructed to do so. See Kafatris & Anor v FC of Tas 2008 ATC 20-048, 8649.
The trustee of the bare trust is merely the nominee of the beneficiaries. The Trustee is a mere puppet of the controlling beneficiary.
One great strength of Trusts is that they are unregulated and private. Even after 500 years, we are coming up with new and exciting ways to use them.
There are 4 types of Bare Trusts in Australia. The Gifting Trust is one of them.
Gifting Trust ‘death bed declaration’
Before this Gifting Trust is created the ‘original owner’ holds both ‘legal’ and ‘beneficial’ interest in the asset. When the Gifting Trust is signed, from that point forward:
- The ‘original owner’ retains ‘legal’ ownership only, as trustee
- The beneficiary named in the Gifting Trust is now the beneficial owner. The beneficiary is now the ‘true’ owner
The ‘original owner’ now holds the assets as bare trustee for another person, being the beneficiary. The legal title remains with the ‘original owner’: only the beneficial interest is transferred.
CGT and Stamp Duty on a Gifting Trust
Therefore, there is no change of ownership at the local titles office But there is still full stamp duty and Capital Gains Tax on the ‘disposal’ of the equitable (beneficial) interest to the beneficiary.
The asset remains in the ‘original owner’s’ name. But transfer (stamp) duty and CGT apply. This is because the Gifting Trust transfers the beneficial ownership to another person – being the beneficiary.
The stamp duty and CGT is the same amount as if you transferred both the legal and equitable interest. The taxation regimes inflict stamp duty and CGT when the beneficial interest in an asset changes – not when the legal ownership is changed.
Gifting Trusts are often called ‘death bed declarations’
Example of a ‘death bed declaration’
Gifting Trust Deeds are often call ‘death bed declarations’. For example, Dad is dying. He builds a Gifting Trust on Legal Consolidated’s website. The Gifting Trust declares that he now holds all his assets in trust for his oldest son. After his death, the other children challenge his Will. But there are no assets in his Will. Therefore, there is nothing challenging.
The other children are mortified. They scream: ‘all these properties are in his name. He owned them.’
That is true, but Dad, before his death, owned them merely as bare trustee. At death, he had no beneficial interest in the assets. This is because, before he died, he signed a Gifting Trust.
‘But Dr Brett Davies said the “Lang Hancock clause” in a Will does not work. He said that you can’t stop the court from challenging your Will’
Dr Brett Davies is right, nothing can usurp the court’s power to rewrite your Will except for a Contractual Will Agreement. But dad had no assets at his death. Before he died he signed a bare trust called a Gifting Trust. From that point on the ‘true’ owner was his oldest son. Therefore, when dad died he had no assets. Therefore, his Will had no assets. He had given them away via a Gifting Trust before he died.
At death, Dad was only the ‘legal’ owner. The ‘true’ owner or beneficial owner was his oldest son. The son got the asset ‘inter vivos’. That is, while dad is still living. Dad held the assets in a bare trust for his son. This bare trust is called a ‘Gifting Trust’.
From that point on the son pays tax on income from the asset. The assets may still be in dad’s name but the courts and the ATO look through the trust to the ‘true’ owner, and that is the oldest son.
Why wouldn’t dad just transfer both the legal and equitable interest to his son? There are two reasons:
- It takes time to transfer an asset. If it was a house then he would have to instruct his lawyers to prepare transfers, dig out the title deeds, sign everything and lodge it with the local titles office; and
- Dad may not have wanted anyone to know how he has benefited the son – until after he has died. Trusts are private. And bare trusts are the most private trusts of all.
Other types of bare trust deeds you build on our law firm’s website:
Declaration of Trust BEFORE You Buy – ‘secretly buy‘
Acknowledgement of Trust – ‘AFTER the Trustee buys‘
Bare Trust Deed – ‘hide assets you own‘
Telephone us for legal advice on building the Gifting Trust Deed – ‘death bed declaration’ Deed.
Adj Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
National Australian law firm
National: 1800 141 612
Mobile: 0477 796 959
Email: [email protected]
Skype: brettkennethdavies