The days of the basic three-page Will are gone, replaced with a modern estate planning Will offering beneficiaries the opportunity to hold assets in a Testamentary Trust (which can be managed by them), to ensure asset protection for your beneficiaries from creditors, relationship breakdowns and unnecessary taxes for generations to come.
Central to the modern-day Will is the variety of different Testamentary Trusts you can set up in your Will to deal with the individual needs of each of your family members, as well as increasingly complex family issues.
WHAT IS A TESTAMENTARY TRUST?
A Testamentary Trust is a discretionary trust established in your Will that only comes into effect upon your death. As the Will maker you decide on the rules and terms of the Testamentary Trust and these are included in your Will. After your death your Will becomes the Trust Deed.
The trust can hold estate assets such as investments, real estate, and cash, for the benefit of beneficiaries during their lifetime, or for a specified period. You may set up any number of trusts within the one Testamentary Trust Will, and each trust may vary in size, can be created using specified assets, a portion of your assets, or the whole of your assets, and have different conditions placed upon them.
A trust can:
• be flexible or non-flexible;
• be controlled by the beneficiary or by someone else;
• restrict the ability of any of the beneficiaries to control the activities and investments of the trust or give them complete control;
• continue for a period of up to 80 years if so required or be wound up at any earlier date if the trustee so decides;
• set out the terms; and
• separate the rules and establish more than one testamentary discretionary trust.
The client decides whether they wish 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.
Testamentary Trusts were once viewed as the domain of the extremely wealthy but with the build-up of superannuation assets and the boom in house prices, many more people need to consider these types of Wills.
WHAT ARE THE KEY BENEFITS OF A TESTAMENTARY TRUST?
Testamentary Trust wills are designed to protect inherited assets while providing significant tax benefits through income splitting, and paying income to minors, and can help with the growth of inherited assets to a degree not possible with an ordinary Will.
Testamentary Trusts provide:
• Significant income tax-splitting opportunities.
• An extremely tax-effective future asset-building entity that can be used to maximise the future growth and value of inheritances.
• Flexibility and choice for your beneficiaries - it is possible for each beneficiary to retain control of the inheritance received via a testamentary trust.
• Protection of the inheritance assets against creditors.
• Protection of your assets to ensure that only your descendants receive your assets.
• Protection for your beneficiaries who are unable to manage their own assets, are in a high-risk occupation; or intellectually challenged or a risk of bankruptcy.
WHAT ARE THE TAX IMPLICATIONS FOR MINORS AS BENEFICIARIES?
If minors under the age of 18 receive income outside of a Testamentary Trust, they are taxed at penalty rates of;
• 66% on income between $417.00 and $1,307 and
• 45% thereafter
If minors receive income from a Family Trust, they are taxed at penalty rates.
If minors earn income from a Testamentary Trust established in a Will, they are taxed at the normal adult tax rates.
THREE GENERATION TESTAMENTARY TRUST
The most common Testamentary Trust these days is the three-generational Testamentary Trust.
The flexibility of a three-generational Testamentary Trust means it can cater to the individual needs of each of your beneficiaries and provide not only for your children, but also your grandchildren and great-grandchildren.
HOW ARE TESTAMENTARY TRUSTS STRUCTURED?
A Testamentary Trust has three essential elements: the trust assets, the trustee, and the beneficiary. In some cases, an appointor is also nominated.
The trustee has legal control of the trust and its assets and manages them in accordance with the Will. The trustee also has the authority to determine how trust income (such as rental income from an investment property) is invested, and which (if any) of the nominated beneficiaries receive income and capital distributions each financial year. The trustee (or multiple trustees) is often the deceased’s surviving partner or adult children. It can also be a trustee company.
The beneficiary (sometimes referred to as a ‘class of beneficiaries’) is often one or more family members including, a spouse or partner, children, grandchildren – even extended family members. A trust beneficiary can also be a company or the trustee of another trust – although this may result in taxation disadvantages. The trustee may also be a beneficiary, but not the sole beneficiary unless there is more than one trustee.
The appointor has ultimate control over the trustee, with the authority to appoint and remove the trustee from the trust at any time.
Testamentary Trusts, while largely promoted as a tax saving mechanism have many other advantages. Their inherent flexibility makes them worthy for consideration in your overall estate planning strategies.
Scammell & Co have experienced Wills and Estate Planning lawyers who can tailor your Testamentary Trust Will to achieve particular objectives for both your estate and your beneficiaries.
For further information on our Estate Planning services, please follow the link here
*This information is current at the time of publication. For accurate legal advice, please contact Scammell & Co on 08 8440 270.
