Testamentary Trust – what is it and should I have one?

Current of a March 2016

A Testamentary Trust is a trust established under a Will and it only comes into operation after the death of the person who has made the will (the Willmaker).

There are many factors to consider in deciding whether to set one up. Our article covers a few of these factors.

The key factors to consider in deciding whether to setup a testamentary trust are:

  • The size of the estate/assets – are they large enough to warrant creating a more complex structure?
  • The need to protect the assets when in the primary beneficiary’s hands – is there a potential bankruptcy risk or marital problems for the beneficiaries?
  • The personal needs of the beneficiary – are there beneficiaries under the age of 18 that need funding for their education and well being?

The advantages of a testamentary trust are:

  • Income tax savings – beneficiaries under 18 years of age are taxed at normal adult tax rates on certain testamentary trust income distributed to them. This means that minor beneficiaries can enjoy the benefits of the tax-free threshold and progressive tax rates without worrying about the penalty tax rate (currently at 47%).
  • Distribution flexibility – like a discretionary family trust, a testamentary trust can have the same distribution flexibility so it can stream different categories of income (i.e. franked dividends) to different beneficiaries.
  • Asset protection – like a discretionary trust a beneficiary of the testamentary trust does not have proprietary rights to the assets of the trust, therefore it is difficult for creditors to go after the beneficiary for the assets of the trust. The same protection is also available to the trustees of the trust as a trustee in bankruptcy does not have an entitlement or claim on the assets of the trust.
  • Protection from divorce – assets placed in a testamentary trust make it harder for the divorcing spouse or partner of a beneficiary to gain access to the assets as it is generally protected from the reach of the Family Court.
  • Protection from beneficiary – if the beneficiary has a personal problem, such as a gambling or drug addiction, a testamentary trust controlled by an independent trustee can protect the assets from the beneficiary and at the same time use the assets to provide care for the beneficiary or the beneficiary’s children,
  • Protection from new spouse or partner – if the Willmaker dies and leaves the assets to the spouse, he/she will have legal right and enjoyment of the assets, and can share or transfer those assets to their new spouse/partner. Where children are involved it may be worthwhile considering placing the assets in the testamentary trust to provide for financial assistance and care for the children in the long term while shielding the assets from the new partner of the spouse.

There are also some disadvantages of having a testamentary trust:

  • It is more expensive to setup (as part of the will drafting).
  • There is ongoing annual costs to administer the testamentary trust once it is in operation.
  • If you plan to place your main residence in the trust, CGT ramifications will need to be considered.
  • Having property in a testamentary trust can trigger land tax issues.

Should you have any questions, or would like to know more about testamentary trusts, please do not hesitate to contact us on 9923 2666.

DISCLAIMER
This newsletter has been produced by Stanley & Williamson as a service to its clients and associates. The information contained in the newsletter is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas contained in this newsletter, it is imperative you seek specific advice relating to your particular circumstances. Liability limited by a scheme approved under Professional Standards legislation.