Testamentary Trusts

Testamentary Trusts

Testamentary trusts can be an excellent tool for your estate plan and are simply trusts that are drafted into your will and established once you pass away. There are many different types of trusts that can be created by your will and tailored to your specific circumstances. Testamentary trusts can be as simple as an inheritance being held until your beneficiary reaches a certain age (minors trust) or as intricate as you require, covering different classes of beneficiaries and all sorts of rules. All types of testamentary trusts can and should be personalised to achieve your goals.

Some of the most used testamentary trusts are testamentary discretionary trusts (as opposed to fixed, hybrid, minors, or capital restricted trusts, among others) which are set up to have a wide range of potential beneficiaries, meaning no one person is absolutely entitled to receive a benefit in any one year. The trustee, (the person in charge of the trust) decides each year who will be paid the income earned and when to distribute the capital of the trust, to whom, and how much of it. This highlights the importance of choosing the right trustee, and ultimately who can decide to replace this trustee if the need arises.

The main benefits of discretionary testamentary trusts are asset protection and tax planning.

We all hope that our beneficiaries will lead happy and successful lives, but the reality is that life can be complicated, be it an unsuccessful business or bad investment leading to bankruptcy, a professional being sued, or marriage breakdown. Inheritances received and managed through testamentary trusts may be protected from bankruptcy or litigation as the inheritance is not directly owned by your beneficiary. While the Family Court of Australia will consider all assets of the parties when deciding on a split of matrimonial property, where an inheritance is kept separately from combined assets it is more likely to be considered a financial resource of one party, rather than an asset to be split.

Testamentary trusts can also lead to significant tax savings by taking advantage of the wide range of potential beneficiaries, particularly if that includes minors. Where a minor receives income from a testamentary trust they will be taxed at normal adult tax rates which most importantly allows them to access the full adult tax-free threshold. For the current income year this equates to $19,200.00 that can be received before any tax is payable, which is in stark contrast to the $416.00 threshold for other types of unearned income received by minors. Where you have multiple minors you can see that these benefits really add up. Changes to the Income Tax Assessment Act 1997 (Cth) announced in the 2018-19 Budget which passed this month do not remove the exemption to minors’ tax rates for income received via a testamentary trust. They simply clarify that it only applies to income derived from the assets of the estate, and not any other amounts later added to the trust.

There are many ways to tailor testamentary trusts depending on your main objectives, including the level of control your beneficiaries will have, who the beneficiaries will be, and what benefits each type of beneficiary can receive. It is also important to carefully consider who will be in charge as well as the various state and federal tax consequences for different beneficiaries and trustees, and have advisers who understand these implications.

If you would like to find out more about the benefits of using tailored testamentary trusts in your estate plan contact us on (07) 3221 9744 or visit our website to get started online.

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