testamentary trust benefits - estate-planning-with-testamentary-trusts

Estate Planning strategy

Testamentary trust benefits in estate planning range from flexibility for the testator;  to clarity of intent for the executor (and/ or the trustee).

A Testamentary trust can best be thought of as a trust that is created by a provision in your Will: it will provide guidance for specified assets in your estate following your death. For many, it is a simple ‘family discretionary trust‘ settled by a deceased estate: but many variations are available – and yours should be structured to suit the particular circumstances for which you are seeking to provide.

Testamentary Trust benefits

Tax 

The much-heralded testamentary trust benefits for estate assets include the fact that any income gains, capital gains and franked dividends can be distributed among all the family beneficiaries each year in the most tax-efficient way. Correctly drafted Testamentary Trusts can reduce the amount of tax payable by your beneficiaries on income earned from the estate. In particular, they have the capacity to obviate the penalty tax that children under the age of 18 pay on unearned income.

Just as income and capital gains derived by children under the age of 18 years from assets received as a result of a Will are not subject to penalty tax rates, so income and capital gains derived by children from a Testamentary Trust (which was created as a result of a Will or, in special circumstances in spite of a person having died intestate) are not subject to penalty tax rates.

Accordingly income and capital gains from this source will be subject to normal individual tax rates.

This has the following significant tax advantages:

Each child has a tax-free threshold of $18,200. Taxable income between $18,201 and $37,000 will be taxed at the low rate of 19%. If the child’s total taxable income exceeds $37,000 then they will be entitled to the low income tax offset of up to $445 – on a sliding scale. The Medicare levy will also be payable by the child if their taxable income is in excess of $20,542 (the threshold for 2012/13). Imputation credits attaching to franked dividends received through distribution from a deceased estate can be effectively used by the child to reduce any tax impact.

The tax concessions do not apply solely to income and capital gains derived by the trust from inherited assets. They also apply to any income and capital gains derived from assets acquired from the reinvestment of moneys received from the original inherited assets.

Testamentary Trust benefits include Asset Protection

Many clients are concerned about protecting their assets. One of the testamentary trust benefits delivering significant advantages for a testator – and their nominated beneficiaries (beyond the taxation considerations) – includes facilitating retention of assets within the family for the use and benefit of family members. Some particular benefits include protection from:

  • beneficiaries becoming bankrupt, especially those that are involved in highly leveraged businesses.
  • beneficiaries becoming divorced and their assets being split in the divorce settlement process.
  • spendthrift children.
  • the risk of remarriage and the surviving spouse being able to pass on their assets to their children upon their death.
  • handicapped and other ‘special needs’ dependants.

The protection afforded by a testamentary trust is provided by the assets being owned by one entity (the trustee – in whatever form), and that the benefit of the income and capital of the trust passes to other individuals as beneficiaries. This separation of control and benefit allows testamentary trusts to protect assets from any legal action involving the beneficiaries and/or misuse of those assets.

The terms of the testamentary trust are set out in the Will. These terms provide for the degree of control any of the beneficiaries have over  the activities and investments of the trust. The usually most reliable way that a client can ensure that the assets are fully protected is to have at least two trustees: an independent trustee together often, with the primary beneficiary (provided that beneficiary is not a minor). Trustee companies and incorporated trustees are also able to be employed for the purpose.

The testator client needs to decide whether they prefer to sacrifice the independence of the beneficiary to ensure that the inherited assets are protected and used sensibly for the benefit of the primary beneficiary and their family and to take advice from an estate planning specialist as to how best manage that intention.

There is no legal limit to how many testamentary trusts a will can establish. In relevant circumstances, a Will would establish a separate testamentary trust for each beneficiary – particularly those with ‘special needs’ being isolated from others.

What to do now..

The experienced advisers at Continuum Financial Planners Pty Ltd have options available for you in dealing with Estate Planning matters and can prepare your brief to a specialist in the area aimed at optimising the value to you in undertaking your estate planning. As with all of our holistic wealth management services, ‘we listen, we understand; and we have solutions’: to find out more, contact us on 07-34213456; or email our helpful staff via our Contact Us page.

[This article was originally posted in August 2009: it has been occasionally updated and/or refreshed, most recently in March 2017.]