Some final closing notes about trusts – this is the post about how trusts get passed on and inherited when you’re gone.
Your family trust does not form part of your estate when you die – your will doesn’t control what happens to the trust afterwards. Instead, the trust follows the rules/guidelines outline in your trust deed, quite independently from your personal will.
Typically this will mean that somebody else will take over the role of the trustee and continue managing the trust for the beneficiaries. Hopefully with the same level of gravitas and commitment as you planned for when you set the whole thing up! The process of how the new trustee is chosen should have been outlined in the trust deed when the trust initially gets set up.
The good news is, you don’t need to pay CGT again when the new trustee takes over management of and ownership of the assets in the trust! However, stamp duties may be still be payable at the time. So the assets can continue to appreciate in value without fear of a big tax burden!
Of course, you can’t shelter assets in a trust like this forever. The maximum duration of a trust is 80 years from the date of establishment – at which time it has to be ‘vested’ and wound up. (Except in South Australia, apparently?!) The vesting date is something that gets specified in the trust deed when it is set up. You could choose to set it as the maximum 80 year, or you could voluntarily choose a shorter time frame – maybe you only want the trust to last for one generation, for instance.
What this means is that by the vesting date, the trust needs to wound up and all the assets inside it distributed to the beneficiaries. This is the part where tax does become an issue! Capital gains tax does need to be paid on the transfer of these assets back out of the trust. The distribution could either be done as a transfer of the capital as assets to the beneficiaries, or by liquidating the assets within the trust and then distributing the capital as cash. Either way, this triggers a capital gains tax event.
Note that this is quite different from normal inheritance of an estate in Australia, which does not trigger any estate taxes. When you leave behind an inheritance, the beneficiaries only pay capital gains taxes on their inheritance when they sell the assets. Nor is there any stamp duty payable on inheriting these assets. So it is important to remember that while family trusts can offer excellent income tax savings, they cannot be used to minimise taxes in perpetuity.