A Will containing Testamentary Trusts provides your beneficiaries with a fantastic investment vehicle that they can use for the rest of their lives and pass on to their children.
Testamentary Trusts provide asset protection and tax minimisation for those who benefit from your estate, so you can rest in peace with the knowledge that you have left your family the best investment entity available today.
What is a Testamentary Trust?
It is a Trust established under a Will, but it does not come into effect until after the death of the person making the Will.
Under a Testamentary Trust, the Trustee has the discretion to distribute capital and income between a group of beneficiaries nominated in the Will. Each beneficiary is usually the trustee of his or her own trust. If they are too young to be trustees, then the Will’s executors will be trustees until the beneficiaries are old enough.
Usually a beneficiary’s children and grandchildren are the discretionary beneficiaries of the Testamentary Trust. A Trustee decides which of the discretionary beneficiaries will be allocated income and/or capital.
Each beneficiary will control the gift as if he or she owns the assets in the trust, but will enjoy the protection afforded by the trust.
There are two main benefits of a Testamentary Trust: protection of assets and tax minimisation.
Protection of Assets
The assets form part of a Trust and therefore they cannot be taken out of the Trust without the Trustee agreeing to distribute them to the beneficiaries. None of the assets are legally owned by the beneficiaries, which will protect the assets of the Trust from some of the following circumstances:
a) Creditor protection – to protect the gift from creditors of a beneficiary. If an intended beneficiary is:
i. at risk of being made bankrupt; or
ii. in a high risk profession or business where negligence claims are likely,
then a Testamentary Trust will protect the inheritance so that the inheritance will not be at risk of being required to be given to the Trustee in Bankruptcy or to creditors.
b) Divorce/breakdown in relationship of a beneficiary – if an intended beneficiary separates from their spouse or partner the assets held in a Testamentary Trust have protection from the spouse or partner. The Family Court does not usually class them as assets of the beneficiary but as a financial resource of the beneficiary. Generally this means the beneficiary may receive less of the marital assets but will retain all of the inheritance held in the Testamentary Trust. However, the Family Court has the power to distribute assets of a trust to an ex-spouse. The Court has had this power for a number of years. Notwithstanding, the Court has not yet exercised that power in any cases involving Testamentary Trusts. It is still the best protection to try to prevent your hard earned money going to your ex-daughter in law or ex-son in law.
c) Vulnerable beneficiaries – if one of your intended beneficiaries is either a spendthrift or has a gambling addiction, or an alcohol/drug addiction, you can provide for such a beneficiary through a Testamentary Trust ensuring that his/her share of your estate is protected.
d) Remarriage of your spouse – in this situation the Testamentary Trust is useful for people who wish to provide for their spouse but are concerned that the spouse may remarry and divert the family assets to the spouse’s new family or, as sometimes happens, uses the family assets in risky or unprofitable ventures at the suggestion of the new spouse.
Taxable income generated by the trust can be allocated to the beneficiaries of the trust in a tax effective way. Under the trust, the Trustee has the power to distribute the Trust income to any of the persons nominated as potential beneficiaries under the Trust; usually the Trustees children and grandchildren.
Where distributions are made to children under the age of 18 years in a normal family trust deed, the tax-free threshold is $416. Any income the child is allocated above this amount is taxed at the highest marginal tax rate.
Testamentary Trust income distributed to children under the age of 18 is taxed at normal individual tax rates. That is, they are taxed like an adult. Accordingly, there will be a tax-free threshold each year for each child. The current tax-free threshold is $18,200, which is significantly higher than $772. Where there are several children and/or grandchildren the tax relief can be very significant, particularly when there is a number of years until the children attain the age of 18.
What should I consider before establishing a Testamentary Trust under my Will?
Factors that you should consider include whether the income generated by your estate will be sufficient to warrant a Testamentary Trust, whether you have sufficient assets in your estate and whether any of the above apply to one or more of your intended beneficiaries.
The incorporation of testamentary trusts into a Will is not relevant to every situation but in many cases it offers valuable advantages over simple Wills.