ROBERTS NEHMER MCKEE
You’ve worked hard during your lifetime and you want to make sure that your loved ones are looked after should something happen to you. Perhaps even more importantly, you need to know that if something happens to both you and your spouse that your children will be financially cared for into their adulthood. If this sounds like you, then a Testamentary Trust might be exactly what you need.
What is a Testamentary Trust?
A Testamentary Trust is simply a trust that is created under your Will. The trust lies inactive and dormant until you pass away, when it is then activated with your Will.
Just like an ordinary trust, a Testamentary Trust is a structure where a person/s (the Trustee) manages and distributes assets and/or income to a selected group of people (the Beneficiaries) under the watchful eye of another person/s (the Appointor).
There are several different types of Testamentary Trusts that can be created, but the most popular is a Testamentary Discretionary Trust with either a lineal (where only blood relatives can benefit) or non-lineal (where beneficiaries can also include spouses and nominated persons who aren’t necessarily blood relatives) structure.
What are the key benefits of a Testamentary Trust?
(1) Asset protection
Assets that are within a trust are not legally ‘owned’ by any of the trust’s beneficiaries until the assets are distributed out of the trust (which is usually not until the trust is wound up). Beneficiaries can receive distributions (income) from the trust along the way, but the actual assets remain the property of the trust. This provides a level of protection to the beneficiaries from:
(a) Family Law proceedings;
(b) Bankruptcy or creditor issues; and
(c) High risk financial activities (i.e. if a beneficiary loses everything they own, they still have a nest egg to fall back on)
Testamentary Trusts also afford a level of protection to beneficiaries from themselves. Even the most responsible 18 year old can risk losing their whole inheritance if they are given a large lump sum on their 18th birthday; whether it be by the purchase of depreciating assets (hello, shiny new Ferrari) or from general financial inexperience. Having a Testamentary Trust in place enables a child to be dripped out sufficient monies to set them up in life, without them having access to the actual capital until a later age set by the Testator in their Will.
(2) Tax Benefits
A discretionary Testamentary Trust enables the Trustee to distribute income from the trust in a way that is tax effective for the beneficiaries (for example: by distributing income to the children rather than to the surviving parent who might still be working).
Testamentary Trusts also enjoy tax benefits that are not afforded to normal trusts. One key benefit is that all child beneficiaries are taxed as if they were an adult, which entitles them to receive the graduated tax free thresholds that adults enjoy, rather than being taxed at the flat 46.5% tax rate that children are normally slugged with under a normal trust distribution.
A well structured Estate Plan can also direct your superannuation and/or life insurance proceeds into your Testamentary Trust, rather than gifting them directly to a named beneficiary in one lump sum. By funneling these large amounts into the trust, the payments are preserved from being squandered and can then be dealt with in a way that minimises the taxation payable on their proceeds. This is particularly valuable if the beneficiary receiving the payment is not a tax dependent of the deceased, in which case the taxation payable by that recipient can be prohibitive.
A Testamentary Trust can allow you to protect and provide for your loved ones long after you have passed away, which is a beautiful legacy within itself. They’re not difficult or expensive to create, and they afford the Testator a peace of mind that is priceless.