Why have a testamentary trust

Strategy , Growth , CFO. Strategy , Business , CFO. Wealth , Strategy - 8 min read. A testamentary trust is created by your Will, and is a useful vehicle in your overall estate planning strategy. If one or more of your beneficiaries is in a high-risk profession firefighter, police officer, active military, etc. Since assets that are held in the trust are not assets belonging to any one individual, the Family Court cannot make an order requiring the distribution of those funds.

Therefore, a testamentary trust can be an effective way of making sure your divorced child receives his or her inheritance. Some children are more trustworthy than others. A testamentary trust can be an effective management tool when you need to make sure that disabled or intellectually impaired children rely on your estate for their well-being.

There are many ways to structure your estate. Most of the advantages of testamentary trusts lie in their structure. The separation of control and benefit allows these trusts to protect assets from legal action or people who would not make wise financial decisions. Your estate would be protected from bankruptcy and court orders, keeping it intact for your beneficiaries.

Reducing tax in estate planning is a worthwhile process. One of the biggest tax advantages of using a testamentary trust is the fact that income, capital gains, and franked dividends are distributed among your beneficiaries each year in a tax-efficient way.

The trust does, however, have to pay tax on undistributed income. The trustee has the discretion to distribute income to as many beneficiaries as possible, and these distributions can be personalised. Then the beneficiaries pay tax on their distributions.

They also apply to income and capital gains derived from assets the trust acquires with the funds that existed in your original estate. Depending on your unique situation, there may be tax advantages for any of your beneficiaries who are eligible for a pension. This is because the assets of a testamentary trust are not accounted for when pension eligibility is established.

In most cases, there will not be any tax due on the transfer of your assets to your executor and then to your testamentary trust. Additionally, there should be no tax on the cash proceeds of your life insurance policy or your super death benefit.

This is also the case for assets that originally belonged to you. Self Managed Superannuation 30 Sep Tax 1 Oct Thinking 24 September Testamentary trusts.

You might be also interested in No testamentary trust. Testamentary trust. The trustee s may, at their discretion, distribute all or part of the assets to the nominated beneficiaries. Assets from the first marriage could be diverted to the benefit of the new spouse and by extension, their family if something were to happen to your spouse ahead of their new partner. In a testamentary trust, if one spouse dies, and the other remarries, assets held in the trust can be protected for the benefit of the nominated beneficiaries i.

Assets held in a testamentary trust may also be protected against Family Law litigation brought by spouses who look to make a claim for family assets within the context of a marriage breakdown.

An inheritance held in a testamentary trust is unlikely to be the subject of a Family Court Order, although it may be regarded as a financial resource and thus impact upon the actual terms of a property settlement. Assets held by the trustee of a testamentary trust may be insulated from potential third-party claims made against individual beneficiaries. If a beneficiary is experiencing solvency issues , it is possible that the inherited assets may be susceptible to claims made by creditors.

The assets are not held by the beneficiary, but rather by the trustee for an on behalf of the beneficiary, with a discretion to distribute to any of the nominated beneficiaries. A testamentary trust is particularly beneficial for intellectually disabled beneficiaries, as well as beneficiaries with illnesses, addiction problems or other weaknesses which could result in the loss or dissipation of an inheritance.

If a child or other beneficiary is temporarily incapacitated, testamentary trusts will enable the assets to be managed by the family for the benefit of that beneficiary, rather than having a portion of the estate controlled by a government agency.

In the case of a grandparent leaving bequests for the payment of boarding school and tuition fees for their grandchildren, the use of testamentary trusts allows a degree of control over the application of such assets, which is more effective than leaving additional bequests to parents in a Will. Under a Will, if a child or other beneficiary is experiencing solvency issues or is bankrupt at the time of distribution, the beneficiaries may not receive the gift as creditors are able to claim it.

If a beneficiary is considered to be working within a high risk business or profession where negligence or other claims are a risk, a testamentary trust also protects the inheritance from these types of claims. However, under a testamentary trust, children under eighteen are taxed as ordinary taxpayers, commencing at the lower tax rates.

When compared to distributions made either directly, or under family law trusts, this results in considerable reductions in the total tax payable when distributions are made to children and grandchildren until they reach the age of eighteen. Capital gains realised on assets held by a testamentary trust can also be streamed to one or more beneficiaries in a tax effective manner.

Where one or more of the beneficiaries has a low income in the year of distribution, distribution to this beneficiary allows them to take better advantage of the five year averaging rate of capital gains tax losses. In turn, tax payable on capital gains on realised assets can be considerably reduced.