The Bulletin August 2018

TAX FILES
In Ledgerwood v Perpetual Trustee Company
Limited 40 Young J did not follow Re Keen 41
where the communication occurred
after the will was made stating that “it is
against the conscience of the donee that
the donee should be permitted to have
undertaken to the testatrix to carry out her
wishes and then not to have done so.”
There are a couple of recent Canadian
decisions on pour-over provisions in
wills. 42 The decisions, in effect, take the
view adopted in re Jones 43 in England that
such provisions are ineffective where
they are in favour of a trust that may be
subsequently amended. In Re Estate of
Kellogg 44 many of the foregoing English
decisions were cited in a case involving a
clause in a will in favour of trustees of an
inter vivos trust that had been amended after
the will. Gray J said: 45
The gift cannot “pour over” to be held by the
trustee of the KF Trust on the terms which
existed at the time the Will was executed,
because that trustee is now obliged to follow the
terms set out in the Amendment to KF Trust.
The gift cannot “pour over” to be held by the
trustee on the basis of the Amendment to KF
Trust because the effect would be to permit
RPK to have effectively amended his Will
without complying with the Wills Act.
In the very recent decision of the Estate
of Quin deceased 46 it was argued that a pourover
clause was valid under the informal
will provisions in the British Columbian
wills legislation. There was no attempt
to find the pour-over clause valid by
incorporation by reference. The informal
will provisions were held not to assist in
such a situation. The pour-over clause was
held to be invalid. In doing so the Court
quoted the following from a 1960 article: 47
The allied problem raised by the legitimate
desire of a testator to pour assets from his
will to a revocable inter vivos trust is a matter
of serious difficulty under Anglo-Canadian
jurisprudence, and the short answer is that
under present decisions it probably cannot
be done with safety and should not be
attempted. The decisions in this area are most
38 THE BULLETIN August 2018
unsatisfactory since the reasoning proceeds
almost entirely on the basis of incorporation
by reference even in those cases where it is
perfectly clear that the testator had no intention
whatever of incorporating the trust or the trust
instrument or anything else into the will but
demonstrates the obvious intention of making a
gift to the trust.
This has caused no difficulty with us if the
trust is irrevocable; in that situation the court
properly deals with the matter on the basis of
an accretion to the trust [Re Playfair, [1951]
ch. 4]. Given an amendable or revocable trust,
and even though the trust has not been amended
after the execution of the will (or at any time),
the pour-over is held to be invalid on the ground
that the document is “future” and therefore does
not satisfy the prime requisite of incorporation
by reference, namely, a “presently existing
document.” The testator cannot, it is said, by
his will create for himself a power to dispose of
his property by an instrument not duly executed
as a will or codicil.
In summary, notwithstanding the
decision of Gregory v Hudson 48 there is a
body of law that suggests that a gift in a
will in favour of the trustee of an existing
inter vivos trust, with a power of variation,
is at risk of being held to be ineffective.
SOME TAXATION ASPECTS
Apart from the foregoing issue there
are a number disadvantages from an
income tax perspective of using pour-over
provisions, even if effective in accordance
with the decision in Gregory v Hudson.
They involve the loss of the advantageous
treatment of testamentary trusts 49 and
child beneficiaries of such trusts in the
income tax laws. These disadvantages will
not apply where the provisions are read
into the will by reference. They are briefly
described. 50
Section 99A(2) of the Income Tax
Assessment Act 1936 (Cth) (ITAA36)
provides that the Commissioner may not
apply that section to a trust estate that
resulted from a will or codicil or a court
order varying a will or codicil. 51 Section
99A otherwise provides for accumulations
of income by trustees of a trust to be
taxed at a special rate, namely in practice,
the top marginal tax rate.
Division 6AA of ITAA36 provides for
income of certain children, generally those
less than eighteen years of age, to be taxed
at a special rate on their income, including
trust income, with some exceptions. One
of those exceptions is assessable income
of a trust estate that resulted from a will or
codicil or of an order of a court varying a
will or codicil. 52 Section 1(b) of Schedule
10 of the Income Tax Rates Act 1986 (Cth)
provides for a trustee to be assessed under
section 99 at the same rates as an individual
on income that no person is presently
entitled of an estate of a deceased person
who died less than three years before the
end of the year of income.
The capital gains tax (CGT) provisions
of Parts 3-1 and 3-3 of the Income Tax
Assessment Act 1997 (Cth) (ITAA97) also
variously distinguish between trusts to
which Division 128 applies 53 and various
others. Division 128 applies to CGT
assets of a deceased person that pass to a
legal personal representative and appear
in effect to remain the subject of the
trusts of a will or codicil of a deceased
person including as varied by a court
order and possibly in some situations
by a deed of arrangement. 54 In practice
such assets appear to remain the subject
of a testamentary trust in the hands of
a trustee after the initial administration
of the deceased estate until actually
distributed to a beneficiary. 55
CGT events E5 (a beneficiary becoming
absolutely entitled to a trust asset), E6
(disposal to a beneficiary to end an income
right), E7 (disposal to a beneficiary to
end capital interest) and E8 (disposal by a
beneficiary of a capital interest) are subject
to an exclusion for a beneficiary under a
trust to which Division 128 applies. 56 In
other words those CGT events are not
triggered where the trust involved is a
Division 128 trust and the assets are those
that were owned by the deceased at the
death of the deceased. 57