Testamentary Trusts
Testamentary Trusts are becoming popular as effective and extremely flexible estate planning strategies.
What are the benefits?
Testamentary Trusts can offer your family significant benefits after your death, such as:
v Income splitting.
The trustee of your testamentary trust can distribute income (including interest, capital gains and dividends) among family members in the most tax effective way.
This can save your family substantial tax, particularly if a family member is a child or grandchild under 18, or a partner or other person on a low marginal tax rate.
If you distribute income to your children, they will be taxed at 45%. If the trust distributes, they may pay no tax at all!
v Asset protection.
On your death your nominated assets (which can include your super and life insurance) are transferred to the trustee of your trust. They are then owned by the trustee. They are not owned by a specific beneficiary. This is a key legal concept!
So if, for example, your primary beneficiary (eg your partner or child) is or becomes:
· Bankrupt
· In a high risk occupation and could be sued for negligence, eg a doctor
· Potentially liable for significant debts, eg runs a business with variable cash flow that could go bust
· A borrower or a guarantor of a bank loan
· Poor at handling money (eg is a spendthrift, a gambler or has an illness or mental incapacity)
· At risk that their own Will may challenged by someone claiming that they didn’t receive enough under it
the trust assets destined for them cannot be seized by 3rd parties (subject to future changes in the law). That’s great news for your family and peace of mind for you.
Your trustee can carefully control the payment of income and capital to a beneficiary. Payments can be restricted, delayed or diverted so your primary beneficiary doesn’t lose their inheritance.
A trust may also benefit a beneficiary who is or becomes involved in a family law property dispute with their ex partner.
How do they work?
The testamentary trust provisions form part of your Will. The trust only applies after your death. So you can change it at any time before then if your circumstances or wishes change.
Some features of the trust provisions are:
v Your trustee controls your nominated assets. You decide who the initial trustee will be, eg your partner, an adult child or a trusted friend.
v Your beneficiaries have a choice. They can accept their inheritance immediately, or use the trust for all or part of it. It’s up to them, and they can get tax and legal
advice at the time to help them decide. If there are benefits in using the trust then they can activate it. If not, they can choose to disregard the trust and receive
their inheritance immediately.
v You can make the trust mandatory if a beneficiary needs protection (eg so they can’t access capital until a certain age).
v A trust cannot disadvantage your beneficiaries. The trust will only be activated if it will benefit them.
v Even after your death, the terms of the trust (including the identity of the trustee) can be changed if needed.
v The trust can be terminated any time.
The trust provisions are complex, but I draft them in plain language that is easy to understand. I also customise them for you specifically and include flexible options.
Is a testamentary trust for everyone?
A trust won’t be useful if there are no family interests to protect, eg if you gift your estate to a charity, or to a retiree who doesn’t need asset protection and can’t split income with anyone.
But in all other situations, even if your assets are relatively modest, a trust could be useful for income splitting (eg using grandchildren) or if a beneficiary may need asset protection. You don’t know what your and your family’s assets and circumstances will be when you die, and there is no disadvantage in including a trust in your Will as a precaution. If, when you die, your beneficiaries decide it won't be useful they can ignore it, or if it is useful for a certian period, then they can it at any time.
Remember, if the trust is not in your Will, it can’t be created after you die!
Are you likely to receive an inheritance (eg from a parent or sibling)? If so, you and your family may be much better off if you ask that person to include a testamentary trust for your benefit in their Will. I can discuss it with you and them.