A Testamentary Trust Will is used to give a legacy to one or more beneficiaries by utilising a trust for each beneficiary.
There may be circumstances where you want to establish some control on the distribution of your estate to your family or to other beneficiaries. This can be achieved by including a Testamentary Trust in your Will.
The trust only comes into existence when the executor obtains a Grant of Probate following the death of the person who created the Will.
The Testamentary Trust usually identifies a primary beneficiary who is usually the child or the spouse of the person who created the Will. A significant and diverse range of secondary beneficiaries can be nominated to whom income is distributed. All testamentary trusts are prepared having regard to the Will makers personal circumstances.
There are four significant benefits from establishing a Testamentary Trust:
- Asset Protection
- Tax Planning Advantages
- Capital Gains Tax
It is not uncommon for a person making a Will to want to control how a beneficiary utilises the assets distributed to them by the Will. A Testamentary Trust is helpful in this regard. There may be a beneficiary who needs assistance in managing their financial affairs.
It is important to recognise that the trustee may decide which beneficiaries receive trust income, provided those beneficiaries are nominated within the trust.
Consequently, a trustee can make tax efficient choices when distributing any income, capital gains and dividends.
A Testamentary Trust creates an opportunity to exercise maximum flexibility with superannuation benefits in circumstances where superannuation has been paid to the estate.
A Testamentary Trust can allow a beneficiary to protect the assets in their trust when claims are being made against the beneficiary by a third party. These claims can arise because of court proceedings, bankruptcy or other legal action.
A Testamentary Trust can be very helpful in circumstances where a beneficiary is engaged in a highly risky business venture, or separating from a spouse.
A Testamentary Trust allows a trustee to distribute and divide income generated by the trust in a tax effective way.
For example, as of March 2019, distributions less than $18,200 from a Testamentary Trust to minors is tax free. This is particularly attractive if a beneficiary has a number of young children. This is of great assistance when paying school fees, paying for extracurricular expenses or paying any expenses which can be categorised as expenses paid for the education, advancement or benefit of the minor.
Capital Gains Tax
The ATO views the trustee of a Testamentary Trust in the same manner as it views the executor. This means that a capital gain with respect to an asset on passing from the executor to the trustee of a Testamentary Trust is tax free.
It is well established that a Testamentary Trust is a useful estate planning tool particularly where beneficiaries are children under the age of 18, or where it has been identified that a potential beneficiary has risks or if you would like to protect assets from claims by spouses or partners of your children.
If you have further questions, please contact Andrew Frank at firstname.lastname@example.org.
This is not legal advice.