When discussing Wills & Estates, we frequently hear the clichés of “I can’t take it with me” or “I won’t have to worry about it when I’m gone”. Yet irrationally people who spend their whole lives building wealth for their families benefit, and minimizing tax, choose not to when it comes to planning their legacy. This is especially irrational when you consider that these savings will probably be the easiest they will ever make.
Why a Testamentary Trust Makes sense:
A testamentary trust is a trust established by a Will. It does not come into effect until after the death of the person making the Will, referred to as the testator. Upon the death of the testator, property of the deceased estate is transferred to a trustee who holds the assets on trust for the benefit of the beneficiaries of the Trust.
Upon the death of the Testator, the Estate will be administered by the Executor like any other Estate, however, (and dependent on the wishes of the testator) the assets of the Estate can be distributed (either equally or otherwise) into one (or multiple) Testamentary Trusts. Once distributed to the Testamentary Trust, the Trust will have its own trustee (usually the beneficiary) who can manage the assets of their inheritance with the advantages of the trust structure, bringing significant asset protection and taxation benefits.
The Income Tax Assessment Act 1936 (ITAA) allows that income from testamentary trusts be treated as excepted income for taxation purposes. This means that beneficiaries who are minors will receive the benefit of the increased tax-free threshold of $18,200.00 where discretionary family trust distributions to beneficiaries who are minors are subject to penalty tax rates.
If an intended beneficiary faces the prospect of bankruptcy, an asset held on behalf of the beneficiary through a testamentary trust will not form part of the beneficiary’s estate in relation to bankruptcy proceedings and will be protected from creditors. Similarly, assets held within a testamentary trust are unlikely to be the subject of a court order in the case of beneficiaries being involved in family law proceedings.
There is additional costs to consider with the use of testamentary trusts. These include additional costs to prepare the Will and administrative costs associated with managing the trust once it is in place. However in comparison to the potential savings these costs will likely be recovered several times in the first year of the trust, not to mention the potential benefits to a beneficiary of potentially keeping assets protected from creditors.
The testamentary trust currently offers a vehicle of peace of mind for people who wish to maximize the future benefit of their legacy to their families, or for those who wish to keep their legacy available to beneficiaries that may not be as reliable financially as their parents or partners. It is worth noting that these structures are also available for people with significant life insurance policies, or superannuation funds which can be properly.