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Use Of
Testamentary Trusts In Estate Planning
Effective Estate
Planning is designed to ensure that all of a person's assets accumulated
during their life, are transferred into the right hands at the right point
in time after death and in the most tax effective manner.
A traditional
simple Will is often ineffective in achieving a client's desired objectives
or it fails to assist in best protecting your loved ones. This is why
providing an option within your Will for your beneficiaries to set up a
Testamentary Trust will create considerable flexibility for your beneficiary
to receive their inheritance in the most effective manner.
What is a
Testamentary Trust?
Quite simply, a
Testamentary Trust is a Discretionary Trust built into a Will. The
Testamentary Trust that we have prepared allows any of your beneficiaries to
receive their benefits either as a lump sum in the traditional way or
through a Testamentary Trust.
Benefits of a
Testamentary Trust
Asset
Protection
One of the main
draw backs to a simple Will is that, on death, the assets of your Estate
will simply pass to your beneficiaries. If, for example, one of your
children is in financial problems and owes monies to creditors or is made
bankrupt, their inheritance will pass straight through to the Trustee in
Bankruptcy or the Creditors. Our Testamentary Trust seeks to prevent this
from happening. This is achieved by the fact that the assets within the
Trust are not distributed to the beneficiary and are therefore beyond reach
from any creditors or, indeed, a Trustee in Bankruptcy.
Asset protection
via a testamentary trust is also available where a beneficiary:
• Faces the
prospect of bankruptcy in a worst case scenario, for example, because of
personal guarantees are enforced or because of the nature of the person's
occupation or circumstances carries a risk of litigation;
• is faced with
difficult financial or domestic circumstances, such as the breakdown of the
marriage or de facto relationship;
• has the
prospect of a contested personal estate when your beneficiary subsequently
dies.
Tax Benefits
One of the most
significant reasons why Testamentary Trusts are utilised is to minimise the
amount of tax to your Beneficiaries so that you can increase their net
wealth. In a simple Will, transferring assets to beneficiaries can carry
inherited Tax liabilities, particularly if those assets comprise land or
shares. Transferring your assets to your beneficiaries via a Testamentary
Trust does not trigger any Capital Gains Tax, GST or State Duties.
Allowing your
beneficiaries to receive your assets into a Testamentary Trust provides
considerable tax benefits on the income from those investments. Unlike a
normal (living) Family Trust, where children under the age of 1.8 can only
receive $416 worth of tax fee income, a Testamentary Trust allows your
children to either retain the assets or invest the proceeds and the income
from the investment allocated to themselves, their own children or other
beneficiaries at adult tax rates. Presently the first $6,000 of any income
to that beneficiary is tax free. If any of your beneficiaries are on in high
tax bracket, a Testamentary Trust can be particularly attractive.
If your
beneficiary has children or grandchildren under the age of 18, the tax
benefits can be considerable.
The use of
Testamentary Trusts is an ideal vehicle that will assist your beneficiaries
in retirement planning if they choose lo retire early as a result of
receiving their inheritance and this structure can fit well in minimising
tax with their own investments held in other ways, such as through a
superannuation fund.
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Frequently
asked questions (FAQ's)
1. Do any of
my beneficiaries have to take up a Testamentary Trust if I have a Will which
incorporates a Testamentary Trust.
Answer:
No. Our Wills are drafted in such a manner that allows your beneficiaries
the option to take their inheritance as a lump sum or through the
Testamentary Trust.
2. If I have
more than one beneficiary, do all of my assets have to go into the one
trust?
Answer:
No. Our Wills are drafted in such a manner as they allow flexibility to each
of your beneficiaries to decide how to receive their inheritance. They can
decide to have one trust for all or separate trusts. Your Will is drafted to
allow each beneficiary the option. For example, one of your beneficiaries
may want to receive their inheritance as a lump sum whilst another
beneficiary may want to receive their inheritance via a Testamentary Trust.
3. Who
controls Testamentary Trusts?
Answer:
The original Executors of your Will are appointed as Trustees of the Trust.
However, the individual beneficiaries (referred to as the "specified
beneficiary") have the right to take over control of the Trust or allow the
Trustees of the Will to remain as Trustees of the Trust. This is done for
asset, protection purposes. If your beneficiaries are in financial
difficulties, it is wise that they not be nominated as a Trustee or Executor
of your Will.
4. If my
beneficiaries elect to take up a Testamentary Trust, what do they do with
their inheritance? How do they get access to the assets of the Trust?
Answer:
As each of your beneficiaries control their respect Trusts, they can elect
to receive their benefits as a lump sum, lump sum amounts or keep the assets
within the Trust. They have power to invest the assets within the Trust in
the same way as if they had personally received the benefit and invested the
funds themselves. As indicated, the advantage of investing through the Trust
means that any income can be allocated through the Trust to a whole range of
beneficiaries to minimise taxation.
5. Who are
the beneficiaries of each Testamentary Trust?
Answer:
Our Testamentary Trust documents are broadly drafted to provide considerable
flexibility to your children beneficiaries and how they distribute their
inheritance. In general, our Testamentary Trusts allow your beneficiaries to
distribute either the capital or income held within the Trust to either
themselves, their spouses, children, step-children, brothers and sisters
etc, referred to as the "family of a specified beneficiary". We have also
drafted the Trust to allow distributions to any corporation, such as a
company owned by your beneficiary, or to any religious, charitable or
educational institution.
6. What if
my beneficiary is going through a marital breakdown? How will the
Testamentary Trust affect them?
Answer:
Generally speaking, the Family Court has wide discretionary powers to make
orders in relation to alteration of property between persons after marriage
breakdown and separation. A Testamentary Trust can have a limited benefit in
circumstances of marital breakdown, however, it docs assist in separating
assets from those assets which would otherwise form part of a pool of
matrimonial assets subject to division by the Court.
7. How to my
beneficiaries decide whether to Utilise a Testamentary Trust upon my death?
Who do they talk to?
Answer:
Whether your beneficiaries take up a Testamentary Trust or simply receive
their inheritance by a lump sum will depend on their individual
circumstances. Hill Legal, in association with its financial planning
practice, Life Solutions Financial Advisers, is able to assist your
beneficiaries in determining how to best receive their inheritance. Our
skills allow us to consider how to best receive the inheritance in terms of
your own beneficiary's retirement planning, asset protection and tax
minimisation purposes.
Hill Legal Lawyers
and Consultants |
