testamentary trust (also referred to as a will trust) offers greater control over estate planning and distribution to beneficiaries compared to simple wills.

A Testamentary Trust is as a trust established by a will, the benefits being:

  • maximum flexibility;
  • better asset protection from third parties; and
  • tax planning benefits.

Note that the trust does not come into existence until the person who created the testamentary trust in their Will has died.

Most testamentary trusts nominate a primary beneficiary (such as an adult child) and then allow for secondary beneficiaries such as the spouse of the adult child, grand children etc.

Commonly, a beneficiary of a testamentary trust is the surviving spouse or child of a deceased party. It is possible to have multiple testamentary trusts in a will – one for each primary beneficiary.

This article sets out the four main advantages of setting up a testamentary trust in a will.

1. Flexibility

Testamentary trusts allow for greater flexibility to suit your particular circumstances. For example, it is possible to restrict access to assets or distributions to a particular beneficiary. As a testamentary trust functions similarly to a discretionary family trust, the trustee may decide which beneficiaries receive trust income, provided they are nominated in the trust. This flexibility means that the trustee can distribute any income, capital gains and dividends in a tax efficient manner. Additionally, trustees will have the maximum flexibility to deal with superannuation benefits, in the case that they are paid to the Estate.

2. Estate Planning

Compared to a simple will, a testamentary trust allows beneficiaries to take more control over assets against third parties.

As the trustee holds the title to the trust’s assets (rather than the beneficiaries directly), this allows testamentary trusts to protect assets from any potential litigation, bankruptcy or legal action.

For example, if the beneficiary owes money to creditors and then receives a distribution from a deceased’s estate, creditors will not be able to access the distribution if it is received through a testamentary trust as the trust owns the money. If your surviving spouse or an adult child is engaged in business or holds an occupation with significant risk, a testamentary trust can provide more asset protection. Similarly it may provide family law protection for adult children. However, this is yet to be tested by the Family Law Act 1975 (Cth).

3. Tax Planning

Testamentary trusts allow trustees to distribute and split the income of the trust with tax planning in mind.

Moreover, distributions from a testamentary trust to minors will receive the usual full tax-free threshold concessions, currently at $18,200. This tax planning benefit is considerable to beneficiaries who have children under 18 as they can pay for their children’s expenses out of pre-tax income. This is useful for things such as school fees or other extra-curricular expenses.

4. Capital Gains Tax Benefits

When a capital gains tax asset passes from the executor (the person appointed to carry out the will) to a beneficiary, the law will disregard any capital gain made by the executor. The ATO views the trustee of a testamentary trust in the same way as a legal personal representative of the estate (for example, the executor). Moreover, there is no tax on the transfer of cash proceeds of a life insurance policy or superannuation death payout. However, you should contact your accountant to discuss your particular circumstances.

Key Takeaways

Whether you should include a testamentary trust in your will depends on your particular circumstances and needs. Testamentary trusts can be a useful instrument for effective estate planning. They can be particularly useful where beneficiaries:

  • have potential risk issues (e.g. business interests or may be declared bankrupt); or
  • are children under 18; or
  • you would like to protect assets from claims by spouses or partners of your children.

However, note that the complexity of the structure can be difficult to manage. For example, you will require minutes for each trustee resolution.

Similarly to a will, a testamentary trust does not come into effect until after your death. While it is possible to set up a testamentary trust after you die, your beneficiaries must do so within three years of your death. The beneficiaries of a post-death testamentary trust will be limited to your spouse and children. You can only fund the trust with your assets, as well as payments made in consequence of your death (including superannuation and insurance proceeds).

It is important to note that you must draft testamentary trusts with the will maker’s personal circumstances in mind. Moreover, there are ongoing costs involved in maintaining a testamentary trust such as tax returns for the trust. If you wish to include a testamentary trust in your will, get in touch with our family lawyers or estate planning lawyers. Call us on 1300 544 755 or fill out the form on this page.

Anthony Lieu

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