Testamentary Trust Wills
Have you ever been advised to consider implementing Testamentary Trust Wills rather than a standard will for your estate planning?
Are you interested in ensuring your assets are securely held by your beneficiaries or in the most tax effective structure?
You may be interested in understanding more about Testamentary Trusts.
Rather than offering outright or simple gifts to your beneficiaries in their own personal name, a Testamentary Trust Will establishes a separate discretionary family trust for each of your beneficiaries on your death. Each trust would be controlled by the relevant beneficiary (be it your spouse, child or other family member) and would hold the inheritance left for that beneficiary.
This structure has several key benefits:
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Asset protection
A testamentary trust can assist with protecting assets from creditors and claimants in a variety of scenarios, including insolvency/bankruptcy, will/estate disputes and marriage breakup. It can also be used to prevent a beneficiary from irresponsibly wasting the inheritance given to them.
The level of asset protection provided can be tailored to suit the specific circumstances of the family involved. Whilst the law is developing tools to prevent people using trusts to protect assets from marriage breakup, insolvency and will/estate disputes, there remains a benefit to the asset protection that can be achieved through a testamentary trust.
In general, the greater the level of asset protection required, the less control a beneficiary will be given over the trust and trust assets.
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Tax effectiveness
A properly drafted testamentary trust can save your beneficiaries significant amounts of tax by enabling each beneficiary to allocate income received from the inherited assets between any one or more beneficiaries of their trust.
This operates in the same way as a discretionary family trust established during your lifetime but with a further advantage – the tax treatment of testamentary trusts is more favourable as minor beneficiaries (under 18 years) receive the benefit of the adult tax-free threshold (being $18,200 per annum as at 30 June 2023). This tax benefit is unique to testamentary trusts and if a trust was established during your lifetime (rather than in your will) this tax-free threshold would not apply.
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Flexibility
Testamentary Trusts can provide great flexibility in your estate planning.
They often replace standard wills where a person leaves all assets to their surviving spouse and then to their children, with a more flexible plan.
Increasingly, individuals are preferring to establish a testamentary trust controlled by their surviving spouse, under which that spouse and children are all potential beneficiaries. On the death of the spouse, subsequent trusts come into existence for the benefit of each child and child’s family, which are controlled by the child concerned.
Grandparents are using this structure to provide Education Trusts for their grandchildren which have the added advantage of maximising the tax-free income that can be applied for the benefit of the grandchild.
A beneficiary is not locked into the relevant trust structure – generally, any beneficiary who has reached the specified age (whether 18, 21 or 25 years old or some other age) and has legal capacity, can assume control of the trust and distribute the assets therein in lieu of retaining the trust.
A testamentary trust can also be used to assist a beneficiary under disability to manage their financial affairs by ensuring a fund is established to meet their reasonable needs whilst providing guidelines for administering the fund, using a Memorandum of Wishes.
A well-drafted Testamentary Trust can be particularly useful if the estate is substantial and the will-maker wants to implement a method of managing the capital of his or her estate for the collective and individual benefit of multiple successors, with long-term benefits.
We would generally consider use of a Testamentary Trust Will in any circumstance where it would be beneficial for family members to be given a means to reduce the impact of tax and/or gain asset protection for estate assets, especially for clients with a medium/high value estate or a particular need for asset protection. This can be particularly beneficial where assets are to be held on trust for beneficiaries (particularly minor beneficiaries) for a significant period of time or a beneficiary is at risk of bankruptcy or other legal proceedings.
If you are interested in considering a Testamentary Trust Will for your estate plan, please contact our estate planning team today.
Author: Marnie Papst
Published: 21 December 2023