A Testamentary Trust is essentially a trust that comes into effect upon the death of the testator (will-maker) and can be a useful estate planning arrangement in situations where extra flexibility is needed when the estate is disbursed to beneficiaries, such as circumstances where the beneficiaries are employed in high risk occupations (where their personal assets may be exposed to creditors), where the bankruptcy of a beneficiary is a possibility, where a beneficiaries marriage or de facto relationship breakdown may occur in the future, or certain taxation benefits will likely be beneficial to the beneficiary.
While a Testamentary Trust may not be preferable in every instance, there are many circumstances where they may be more advantageous than a simple Will, and it is important that you decide which option is right for you after consultation with one of our experienced Wills & Estate Lawyers.
Generally speaking, a Testamentary Trust establishes a separate trust for each primary beneficiary and doubles as a trust deed under the deceased’ Will. Upon the Testator’s passing, the Trust comes into effect and the Testator’s property is disbursed into the nominated trusts in accordance with the powers bestowed upon the beneficiaries and trustees under the Trust.
While the beneficiaries generally have control of the assets in accordance with the Testamentary Trust, the assets contained therein are not usually classed as personal property of the beneficiary, which can be advantageous for a number of reasons including potential protection from creditors, relationship breakdowns and tax implications.
Testamentary Trust Benefits
Protection from Creditors
As mentioned above, when beneficiaries are in risky fields of work, where personal assets (such as houses and cash) may be taken by creditors, Testamentary Trusts are typically highly recommended.
Furthermore, due to the increase in bankruptcy and people signing as guarantors to loans, there is an increasing possibility that anyone receiving property under a Will could be subject to a creditor’s action in future.
With the beneficiary controlling the assets of the deceased by way of having them transferred to a Testamentary Trust, the assets will likely be shielded from creditors.
Separation from Partners
Similarly, in the case of a marriage or de facto relationship breakdown, an inheritance which is transferred through a Testamentary Trust is unlikely to form part of the assets of the relationship.
Whilst the assets contained in the Trust may be classified as a financial resource of one of the parties and have some effect on the terms and split of the property of the parties, courts are reluctant to include assets of the Testamentary Trust in a Family Court order. The Testamentary Trust is a particularly beneficial tool that can ensure, for example, a family house or valuable shares stay within the family for future generations.
Although the above features are in themselves good reasons to consider making a Testamentary Trust Will, the dominant reason for the popularity of the Testamentary Trust structure is the tax benefits.
Whilst Affinity Lawyers do not provide financial advice, pursuant to the Income Tax Assessment Act 1936 (ITTA) minors who receive income from a Testamentary Trust are taxed at the adult threshold and accordingly, minors benefit from the normal marginal tax rates which apply to adults. There may also be benefits in respect of potential capital gains tax and franked dividend distribution.
If you have any questions or would like to discuss your options with an experienced estate planning Gold Coast Solicitor, please do not hesitate to contact Affinity Lawyers on 5563 8970.