Estate Proceeds Trusts
What happens when someone dies without a testamentary trust in circumstances where one would be useful?
The Estate Proceeds Trust (EPT) is an option available to executors and beneficiaries to obtain some of the benefits of a testamentary trust, but the deceased has died leaving only a conventional will or no will at all.
What is an Estate Proceeds Trust?
An EPT is a trust established by the beneficiaries after the death of a person to hold property from that person’s estate. The EPT is established by deed. A traditional testamentary trust is established by the will of a deceased person.
When can an Estate Proceeds Trust be established?
An EPT can be established up to three years following the death of the deceased.
What are the benefits of an Estate Proceeds Trust?
EPTs can be beneficial when a person dies leaving children under 18. Under a conventional will (where all of the estate is left to a surviving spouse) the surviving spouse is liable for all of the income tax payable on income earned by the estate assets. Under an EPT, the minor children can pay tax at normal adult marginal rates on estate property, allowing access to the tax free threshold per child. The income can be used for the education, maintenance and advancement of each child.
The EPT also offers asset protection benefits not provided by conventional estate plans – assets can be protected from a surviving parent’s personal risk until the children are old enough to receive the benefits themselves.
What is the difference between an Estate Proceeds Trust and Testamentary Trusts?
There is no doubt that EPT’s are not as flexible and beneficial as traditional testamentary trusts – they are useful in circumstances where, for whatever reason, a deceased did not undertake appropriate estate planning.
The establishment of an EPT may trigger duty and CGT liabilities that would not be incurred in a testamentary trust estate plan, and the beneficiaries of an EPT are limited to people who would have received a benefit under intestacy laws, while testamentary trusts can include much more widely drawn beneficiaries.
When should you consider using an Estate Proceeds Trust?
There are relatively limited circumstances in which an EPT can be considered. When someone has died leaving minor children and only a conventional estate plan (or no will at all), and the surviving family’s objectives include:
- asset protection; and
- income tax flexibility;
an EPT may be worthwhile.
Proper estate planning prior to death is certainly preferable for all families. In circumstances where this has not occurred, EPTs can offer some real benefits to young families that conventional estate plans do not.