Testamentary Trusts
Wills & Estate Planning
Testamentary Trusts Newcastle
Testamentary trusts are created by a Will to provide a greater level of control over the distribution of assets to beneficiaries. There are also tax advantages available through testamentary trusts, making them an effective estate planning tool.
Types of Testamentary Trusts
The two common types of testamentary trusts are:
Discretionary Testamentary Trusts
The Executor gives the beneficiary the option to take part or all of their inheritance via testamentary trust. The primary beneficiary has the power to remove and appoint the trustee and they can appoint themselves to manage their inheritance inside the trust.
Protective Testamentary Trusts
Beneficiary must take their inheritance via the trust and does not have the option to appoint or remove trustees. May be useful where the beneficiary is not in a position to responsibly manage their inheritance due to age, disability or irresponsible tendencies.
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Benefits Of A Testamentary Trust
Tax Benefits
- Testamentary trusts can be very tax effective. Income, capital gains and franked dividends from shares can be distributed among all beneficiaries, each year in the most tax-efficient way. For example, income can be distributed to a minor beneficiary who has no other income, rather than to their parent who is otherwise earning a high income and paying tax at the top marginal rate.
- With a Testamentary Trust, the trustee chooses how to distribute that income from year to year. This enables the trustee to take advantage of lower marginal rates of tax of one or more potential beneficiaries and spread the burden of tax.
- Income distributed to children under 18 from an ordinary trust is subject to a flat tax rate of 47% and the child does not get the benefit of the tax-free threshold and the graduated marginal rates of tax. However, children under 18 do qualify for these tax concessions on income that they receive from a testamentary trust and a large potential saving on tax.
- Testamentary Trusts can also provide benefits when it comes to Capital Gains Tax (CGT) and stamp duty. When you die and an asset passes to directly to one of your beneficiaries, a transfer of all or part of that asset to another person will trigger CGT and stamp duty for that beneficiary. However, a testamentary trust can provide greater flexibility in how assets are transferred and this can greatly reduce the cost of restructuring entitlements under an Estate.
Protecting Your Assets
- The trust structure protects the assets from any claims against the beneficiaries. Where necessary – when the appointed trustee is not the beneficiary – it also protects the trust’s assets from misuse by the beneficiary themselves.
- Testamentary Trusts protect your wealth from unjust claims. Your beneficiaries do not receive the assets directly but rather an entitlement in a trust so if your beneficiaries are experiencing relationship or financial difficulties, a trust can provide a higher level of protection from claims. If a beneficiary faces bankruptcy, an asset held for that beneficiary in a testamentary discretionary trust will not be available to satisfy the beneficiary’s creditors.
- Likewise, assets held in a testamentary discretionary trust are not part of the pool of assets available to be divided up in family law proceedings, in the event of a beneficiary becoming separated from a spouse or partner. A Testamentary Trust will also provide protection for your children or grandchildren in the event your spouse remarries or has other children.
- This protection extends to claims against the estates of your beneficiaries. If the assets to which they are entitled under your will are held in trust, then those assets do not form part of their deceased estates when they die and are not available to any claimant on their estate.
- Testamentary trusts can also effectively protect beneficiaries from themselves. For example, if a beneficiary has an addiction, a bequest could be left in a trust which allows them to receive appropriate maintenance and treatment but does not allow them to access the capital. Testamentary Trusts can protect your children’s inheritance if under the age of 18 as they provide control as to when your children gain access to particular assets and for what purpose.
Flexibility
- A testamentary discretionary trust is established by the terms of your will and gives flexibility as to how and when your beneficiaries receive their benefits from your estate, which protects the beneficiaries’ entitlements and minimises any applicable taxation consequences for them.
- This is possible because, under a testamentary trust, the assets of your estate will be held by a trustee for the beneficiaries, not by the beneficiaries. This applies despite the fact that the trustee can be – and usually is – also the beneficiary of the trust, which gives them total control of their inheritance without the assets being at any risk.
