Testamentary Trust

We may recommend a Will which incorporates testamentary trusts.  You may decide they are not appropriate to your circumstances however we do suggest you at least familiarise yourself with their advantages, before making a decision.

Testamentary trusts are designed to provide maximum flexibility and allow for tax-effective distribution of capital and income as well as providing possible protection from third parties, such as creditors, of your beneficiaries.

In broad terms testamentary trusts can be explained diagrammatically as follows:

If everything is to be left to a single beneficiary:

If there is more than one beneficiary, for example the division of your estate between children:

Depending upon the circumstances:

1. The trustee of a testamentary trust can be your surviving spouse or children (as the case may be). If flexibility is desired the spouse or child trustee will control the gift as if they own the assets in the trust but will enjoy the protection afforded by the trust.
2. If you wish to restrict the control your spouse or child has over the trust assets for some reason you can:
   • Use a third party as trustee, or
   • Limit access to the capital in the trust by only allowing access to income, not capital.
3. Other special forms of trust (some with special taxation relief) are available and we can discuss these if appropriate. For example, trusts set up for a disabled person or to fund education of children may qualify for special taxation treatment.

The principal advantages of incorporating testamentary trusts in Wills are as follows:

Taxation Benefits[1]

Trust income distributed to children under the age of 18 is taxed at normal individual tax rates.  Accordingly, there will be a $10,000 tax-free threshold each year for each child.

Capital Gains Tax[2]

Capital gains can be “streamed” to one or more beneficiaries who are able to take better advantage of the five year averaging rule or CGT losses.

Creditors Protection[3]

Under a normal Will, if a beneficiary is experiencing solvency difficulties or is already bankrupt at the time of a distribution, it is likely the gift will end up in the hands of creditors rather than for the intended benefit of the beneficiary.  This need not be the case where a testamentary trust is used, as the beneficiary has not actual entitlement to a distribution until the trustee so determines.  Accordingly, assets can be retained within the family, free of creditor’s claims.

Family Law considerations[4]

A parent may wish to prevent a child’s spouse making a claim against the family assets in the event of marriage breakdown. If testamentary trusts are used, a child’s spouse would ordinarily have no right to claim that a gift by a parent forms part of the matrimonial property which is to be divided, although it may be treated as a resource available to the spouse.

Incapacity

In the event that a beneficiary is temporarily incapacitated, testamentary trusts will enable the assets to be managed by the family or professionals for the benefit of the beneficiary rather than having a portion of the estate controlled by an external agency.

Superannuation and Insurance Proceeds

Where testamentary trusts are used, the individual or his estate can be nominated as the beneficiary of superannuation or insurance proceeds.  In this way flexibility can be retained and the level of distribution to respective dependants, depending on the circumstances prevailing at the relevant time, can maximise the preferential tax status of the proceeds.

Flexibility

Testamentary trusts generally provide complete flexibility both as to the nature of the investments of the trust and as to the distribution of income and assets of the trust.

[1] Subject of course to future changes in the law
[2] Subject of course to future changes in the law
[3] Subject of course to future changes in the law
[4] Subject of course to future changes in the law