A well constructed and thought out Estate Plan will give you ‘peace of mind’, knowing your Estate will be passed through to future generations in line with your wishes. Including Testamentary Trusts as part of your Estate Plan will give you greater control over how your wealth is distributed to your beneficiaries. They can also provide tax benefits and asset protection benefits.
What is a Testamentary Trust?
- A Testamentary Trust is a trust established by a Will for a beneficiary. A “beneficiary Testamentary Trust” can be optional, that is, the beneficiary can choose not to use it.
- Optional Testamentary Trusts are widely recommended for use in modern Wills because of the taxation and asset protection advantages that they offer when compared to a ‘standard’ Will.
- A standard Will offers little assistance to a beneficiary of an inheritance in relation to issues of tax efficiency and asset protection.
Why use a Testamentary Trust?
Establishing Testamentary Trusts in your Will provides your beneficiaries with maximum flexibility in dealing with their inheritance. The usefulness of a Testamentary Trust to a beneficiary will depend upon the beneficiary’s specific needs and circumstances at the time of your death, so it is important that the terms of the Testamentary Trust are sufficiently broad enough to offer the beneficiary as many options as possible so as to provide freedom and flexibility.
How will my beneficiaries potentially benefit from a Testamentary Trust?
Your beneficiaries may derive the following benefits:
- Offer protection to beneficiaries if their marriage or relationship breaks down - A standard Will puts your beneficiaries in the worst possible asset protection situation, where an inheritance is left easily exposed to greedy spouses or partners on breakdown of your beneficiary's marriage or relationship. A Testamentary Trust for your beneficiary will significantly reduce the risk of loss of an inheritance through relationship breakdown. Thus, you can keep your hard earned Estate in your family, and not ending up with the in-laws.
- Significant income tax savings for beneficiaries - A well-drafted Testamentary Trust can give a beneficiary the option to reduce personal income tax by splitting income from the investment of inheritance between a range of family members on low or lower tax rates. The trustee of the Testamentary Trust (normally the beneficiary) has complete discretion to determine who receives the income of the trust. Tax is paid on the income of the trust as beneficiaries on low marginal tax rates, the Trustee can minimise the taxation of the Trust with each beneficiary being able to receive over $18,200 of income per year tax-free.
- Beneficiaries under 18 attract special tax concessions - Normally "penalty rates" of tax apply to income derived from trusts which is paid to children under age 18. However, the tax legislation allows children under age 18 who receive income from a Testamentary Trust to be treated as adults for tax purposes. This could mean significant tax savings for beneficiaries who can "split income" with minor children.
- Significant capital gains tax savings for beneficiaries - A well-drafted Testamentary Trust can also provide the opportunity for your beneficiaries to minimise capital gains tax which arises from the sale of your assets.
- Inheritance can be protected from immature or vulnerable beneficiaries - A Testamentary Trust can be set up to prevent a beneficiary from 'blowing' their inheritance. You can stipulate a certain age your beneficiary must reach before the fully control their inheritance. Trusts can also be set up for 'spendthrift', disabled or drug dependant children.
- Beneficiary's inheritance can be protected from creditors and bankruptcy - A Testamentary Trust can provide protection to your beneficiaries from the repercussions of bankruptcy or creditors.
What Assets can be put into a Testamentary Trust?
Any assets belonging to you can be left to your beneficiaries via a Testamentary Trust on your death. Additionally, payments made to your Estate as a result of your death, i.e. superannuation death benefits or the proceeds of life insurance, can also be directed to be held within a Testamentary Trust. Offer protection to beneficiaries if their marriage or relationship breaks down. thus, you can keep your hard earned Estate in your family, and not ending up with the in-laws.
If you would like more information, contact John Manuel on jmanuel@prosperity.com.au. Alternatively contact your principal adviser.
