WHAT IS A TESTAMENTARY TRUST AND WHAT ARE THE BENEFITS?
A Testamentary Trust is simply a trust written into your will (or taking effect under your will) to give your beneficiaries flexibility in dealing with your gifts to them.
A testamentary trust can be public (in the will) or semi-secret or secret (for example, by leaving assets to a trusted party to hold on previously defined trusts known only to him and the beneficiaries).
Asset protection and tax benefits
There are many benefits to be gained from a Testamentary Trust, including asset protection, taxation benefits and the ability to help the following generations of your family – your children and your grandchildren.
With thoughtful estate planning, including Testamentary Trusts, you can continue to protect your family after your death while ensuring your family does not have unnecessary tax burdens. Often when your adult children are raising children of their own, they can least afford unwarranted financial burdens.
Where a Testamentary Trust is created under your will, instead of all the assets being distributed immediately to your beneficiaries, some or all of the assets are retained and held in trust for their benefit. Your beneficiaries receive all the benefits of a discretionary trust, including greatly enhanced asset protection, deferred capital gains tax, income splitting and tax effective gifts to charities.
Most Testamentary Trusts are discretionary, with a trustee or trustees who control the trust, a number of discretionary beneficiaries who can receive income and/or capital, including your spouse, children and grandchildren. There is often an appointor, usually your spouse, who controls the trustee.
Under a simple will where assets are distributed directly to the beneficiaries, they cannot gain any of the benefits conferred by a Testamentary Trust.
What are the benefits of a Testamentary Trust?
Because a Testamentary Trust is established by your will, it does not come into effect until your death and you can vary the terms of your will and the trust during your lifetime at any time. As the will-maker, you have absolute control over the terms of the testamentary trust, maintaining control and ownership of the assets up to the date of your death.
Testamentary trusts can also be used to protect vulnerable beneficiaries such as children, the disabled or those with other difficulties.
Although generally controlled by your intended beneficiaries, the assets in a Testamentary Trust do not form part of your beneficiaries’ property during their lives. This means that there is a level of protection from creditors for beneficiaries facing bankruptcy as well as from non-beneficiaries making claims against their property such as ex-spouses or de factos where marriages or relationships break down.
The taxable income of your estate can be distributed flexibly to your beneficiaries under a Testamentary Trust. The income can be distributed among those beneficiaries who pay the lowest rate of tax, thus achieving substantial tax savings.
Children under 18 are not taxed at the penalty rates that normally apply to the trust and investment income of minor children. This is particularly helpful because distributions can be made to younger grandchildren who have no other income and can enjoy full tax-free thresholds. Testamentary Trusts can also be the means for grandparents to help their older grandchildren pay for university or assist with the purchase of a grandchild’s first home.
Stamp Duty and Capital Gains Tax
When assets are transferred to a Testamentary Trust upon death of the willmaker, no stamp duty or capital gains tax is imposed. If an asset passes directly to a beneficiary on death, for example a block of land or an investment property given to a spouse, and that beneficiary decides to give it to another family member such as a child, the transfer of the gifted real estate will be subject to stamp duty and capital gains tax. People often do not transfer investment assets into trusts during their lifetimes because of the capital gains tax and stamp duty involved. A Testamentary Trust in your will is often the only way these assets can be transferred tax effectively into a trust.
Superannuation Death Payments and Deferred Annuities
Many superannuation funds allow you to request or make a “binding nomination” about who is to receive your superannuation or an annuity after you die. Great care must be taken about how your superannuation passes to your beneficiaries if you wish to save tax. In certain circumstances, your family may be able to take the superannuation benefits without incurring a tax burden. In certain circumstances superannuation can be used to fund a Testamentary Trust. This requires careful consideration and proper estate planning.
Testamentary Trusts are an ideal way to make gifts in a tax effective way to charities which are tax exempt but are not eligible for tax deductible gifts, such as schools or churches.
Establishing more than one Testamentary Trust
Depending on the needs of your family, you can establish separate Testamentary Trusts under your will for each beneficiary – for example, for each of your children and their own future families. This means that each beneficiary has control over their own particular share of your estate, avoiding any possible conflicts arising where all or some of the children control a single Testamentary Trust.
If you are not sure about whether you want a Testamentary Trust in your will, it is possible to have a will that allows your beneficiaries to choose whether or not to use the Testamentary Trust that has been created via your will.
Can your parents establish testamentary trusts for you and your children?
If you have elderly parents who want to leave assets to you, it may be wise to have them create testamentary trusts for you and your family. That may provide both asset protection and tax benefits for you and your family. The best gift any parent can make is to help their children raise their own children in turn.
For more information about how Testamentary Trusts may benefit you, we are happy to discuss in detail whether this is an appropriate way for you to safeguard the assets you pass on to your beneficiaries.