What is a Testamentary Trust? Is a Testamentary Trust right for you and your family?
When you think about making your Will, you generally consider the pool of assets available and whom they are to be given to.
When you approach a lawyer and provide them with your instructions to prepare your will, the option of a testamentary trust may not be provided to you.
Below we will provide you with some simple information about what a testamentary trust is and the different types of testamentary trusts available so that you can decide whether a testamentary trust is right for you and your family when preparing your will.
What is a testamentary trust?
A trust is an obligation imposed on a person or other entity to hold assets for the benefit of the beneficiary or beneficiaries. A testamentary trust is a trust established by a carefully drafted will. A testamentary trust can provide a number of benefits to your chosen beneficiaries following your death.
A testamentary trust can live for up to 80 years from your death. Any asset belonging to you can be left to your beneficiaries via a testamentary trust. Multiple testamentary trusts can be created in a will.
The terms of the testamentary trust are created by you via your will. These terms can give as much or as little control as you choose to the trustee when making decisions in relation to the assets and beneficiaries of the trust. You might choose to 'rule from the grave' to ensure that the inherited assets are protected and used sensibly for the benefit of the primary beneficiary, for example.
What types of testamentary trusts are available?
There are three main types of testamentary trusts available:
- Optional - the beneficiary/s can choose whether or not to put the various assets you owned into the trust.
- Discretionary - the beneficiary decides who will benefit from the trust.
- Fixed - the trust is mandatory and has fixed beneficiaries.
A testamentary trust can also contain a mix of the above.
What are the benefits of a testamentary trust?
- Tax income savings - Because there are often a number of beneficiaries to the trust (including minors) the income tax can be split between the members to minimise the tax that is payable.
- Capital gains tax savings - Capital gains tax is not payable when an asset owned by you passes via your will to your executor or the trustee of a testamentary trust. There is no capital gains tax when an asset is transferred from the trust to a beneficiary. The trustee can choose which one of the beneficiaries should take the capital gain. Any capital gains tax arising from the income can be split as per the tax income from any asset to minimise the capital gains tax payable.
- At law, the assets of a testamentary trust are not owned by the beneficiary/s. Therefore, if a beneficiary becomes bankrupt, or is the subject of a family provision claim, the assets held by the trust cannot form part of the beneficiary/s personal estate, and cannot be claimed by a creditor or other person claiming against the beneficiary.
- At law, the assets on a testamentary trust are not owned by the beneficiary/s. Therefore, if the beneficiary suffers a marriage breakdown and a family law claim is made, generally the assets held in the trust cannot form part of the asset pool for a property settlement.
- Disabled child or inheritor - If you have a beneficiary who has an intellectual impairment, you could leave part of your estate for that person's benefit by naming that person as the primary beneficiary of a testamentary trust with a family member, professional advisor or a trustee company as the trustee.
- Centrelink pension - There may be advantages for beneficiaries who may be eligible for a pension. The assets of a testamentary trust are not currently taken into account in establishing pension eligibility under the current means tested pension rules. However, income from the trust is taken into account for income test purposes.
Testamentary trusts are established because of the benefits they provide. It is important to obtain legal advice to consider your individual circumstances to determine whether a testamentary trust is right for you and your family.
If you would like more information on testamentary trusts, we recommend you visit the following links:
- ATO website - information on trusts generally.
- Youtube video courtesy of Retirelaw Pty Ltd - Are estate planning testamentary trust wills right for you?
- Australian Investors Association webpage on testamentary trusts.
We have offices in both Sanctuary Point and Ulladulla, and provide home visits across the Shoalhaven by appointment as and when required.