Why use a testamentary trust in your Will?

Take greater control over your estate planning by using “testamentary trusts” in your Will – and your family will benefit for generations.

Why use a testamentary trust in your Will?

Testamentary trusts are included in your Will to give you greater control over how your wealth is distributed to your beneficiaries. They can also provide tax benefits and asset protection benefits.

If your Will includes testamentary trusts you can achieve some or all of the following outcomes:

  1. Protecting your wealth from unjust claims
  2. Keeping your assets within your family line
  3. Giving assets to your kids over time (the “second chance trust”)
  4. Income flexibility – reduce as well as spread the burden of tax
  5. Marginal rates of tax for kids – turn kids into adults for tax purposes
  6. Capital gains tax and stamp duty flexibility
  7. Reducing tax on your super
  8. Reduced likelihood of claims against the Estate

Read on for more detailed information on each of these potential benefits.

1. Protecting your wealth from unjust claims

When assets pass directly to one of your beneficiaries the assets immediately become available to any person who makes a claim against them.  This includes their creditors if they are in financial difficulty, or an estranged spouse or other relatives if they are going through relationship troubles.

If instead your assets pass into a testamentary trust, the assets benefit from a higher level of protection from such claims.

2. Keeping your assets within your family line

When your asset pass directly to  your spouse, it is not ordinarily possible for you to ensure (“from the grave”) that your children are provided for – particularly if your spouse remarries and has other children.

A testamentary trust can be used to give your spouse control over the annual income from the assets (and possibly some capital), but at the same time provide for the assets to ultimately pass to your children (and in turn your grandchildren, i.e. down you blood line). At the least a testamentary trust will ensure that your children will have a say in how and when the assets are disposed of, and what happens to the cash.

3. Giving assets to your kids over time (the “second chance trust”)

It is well recognised that giving a child significant money at an early age is not good for them.  However, it is ordinarily difficult to prevent a child beneficiary getting their hands on an asset when they reach 18.

A testamentary trust can provide a high level of control and certainty as to when your children gain access to particular assets – and for what purpose.

It is possible to stagger the gifting of your assets over time (for example, when your children reach 21, 25, 30, etc), or to tie the release of your assets to particular events or uses. For example, it is possible to tie a gift to the purchase of a house, education or overseas travel.

Staggering when your children receive assets also gives them a “second chance” if they make financial mistakes earlier in life.  They don’t have to lose their inheritance all at once.

4. Income flexibility – reduce as well as spread the burden of tax

When an asset passes directly to one of your beneficiaries, that person then becomes taxable on all the income from that asset.

Whereas, if the asset passes to the trustee of a testamentary trust, the trustee can choose how to distribute that income from year to year. This enables the trustee to take advantage of the lower marginal rates of tax of one or more potential beneficiaries.

5. Marginal rates of tax for kids – turn kids into adults for tax purposes

Income that is distributed to children under 18 from an ordinary trust is subject to what is termed the “kiddie tax”.  This tax applies at the flat rate of 46.5%, i.e. 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.

This can potentially save a large amount of tax over the life of the testamentary trust, although care must be taken about how the testamentary trust is administered, and how the income distributions to your children is recorded.

6. Capital gains tax and stamp duty flexibility

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.  This is because the beneficiary has a “fixed interest” in the asset from the time of your death.

For example, if you have two children and each is given an equal share in two houses – and if they decide to take one house each – CGT will be triggered on 50% of each house.  (In some states there are also stamp duty consequences.)  This is because each child is transferring a half interest in each house to the other child.

However, if both houses pass into a testamentary trust, each child can usually take a single house without triggering CGT (or stamp duty).  This can greatly reduce the cost of restructuring entitlements under an Estate.

7. Reducing tax on your super

A testamentary trust can also deal with any super or life insurance proceeds payable on your death.

Without proper planning tax of up to 31.5% (usually 16.5%) may apply to the full value of your super payout as a result of your death.

A testamentary trust will provide your Executors with the maximum flexibility to deal with any super paid to your Estate, so as to minimise taxes – as well as provide the other benefits set out above for your super money, i.e. wealth preservation, gradual succession, income flexibility, etc.

8. Reduced likelihood of claims against the Estate

When your assets are given “outright” to particular beneficiaries, it is relatively easy for a disgruntled beneficiary to prove they have not been adequately provided for.

However, a testamentary trust does not have a single beneficiary – but rather a range of “potential beneficiaries” – which can be structured to include a potentially disgruntled beneficiary.  It then becomes more difficult for such a disgruntled beneficiary to bring a claim until the trust has been fully administered.

How to include a testamentary trust in your Will

If you would like to talk about the benefits of using testamentary trusts within your Will, contact us on 1300 654 590 or by email.

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This publication contains general information only, and is not to be construed as legal advice. Laws differs in each jurisdiction in Australia, and may be interpreted or applied differently depending on your location. This publication is not to be used as a substitute for legal advice tailored to your individual situation. Use of this publication does not create or constitute a solicitor-client relationship between Andreyev Lawyers and any user of this publication.

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