A testamentary trust is a trust established in your Will. There are many forms of testamentary trust, however, the most common form is a testamentary discretionary trust. A testamentary trust does not come into existence until after your death. A will could establish one testamentary trust, or multiple testamentary trusts (for example, one for each beneficiary).
These trusts set aside money from your Estate (referred to as corpus) which can be used to generate income. Each trust has a trustee appointed by you who manages the trust. Often the Primary Beneficiary will be the Trustee, though, this is not always the case and depends on their (and your) circumstances. For example, you may wish to appoint a different trustee if your Primary Beneficiary is a minor, or has a history of poor financial decision making.
The trustee decides how income is to be paid or set aside income each year for the benefit of a primary beneficiary, and a wider class of beneficiaries (for example, the spouse or children of the Primary Beneficiary). In some circumstances, corpus can be distributed to beneficiaries.
Testamentary trusts can exist for up to 80 years, and they are a useful strategy for intergenerational wealth planning.
What are the benefits of a testamentary trust?
Asset protection
Assets held in a testamentary trust are protected from bankruptcy of a beneficiary. If a beneficiary is in a high-risk occupation, or has a history of creditor problems, then leaving your estate on a testamentary trust can protect your intended beneficiary.
Tax
Income can be distributed each year amongst the family of the primary beneficiary in a tax advantageous way.
Ordinarily, a person under the age of 18 is taxed at high rates on income earned from trusts established during a person’s lifetime. However, a testamentary trust is exempt from this, and persons under the age of 18 are able to receive trust income at ordinary adult marginal rates. This means, up to almost $20,000 may be distributed to them tax-free each year. A testamentary trust can also benefit children or grandchildren who are born outside your lifetime.
This means a beneficiary of a testamentary trust may be able to access tax advantages by distributing income from a testamentary trust to their children each year, to fund expenses such as their school fees. Likewise, if the primary beneficiary has a high marginal tax rate, they may be able to stream income from the Trust to their spouse with a lower marginal tax rate, or to an incorporated entity (of which they are sole shareholder) at the corporate tax rate, to distribute later in life and utilising any franking credits.
There are complex tax anti-avoidance rules in using these methods; and specific advice should be obtained from a specialist lawyer in wills and estates or taxation to avoid consequences.
Family law settlements
Assets held in a testamentary trust may be protected against division in a family law proceeding for your intended beneficiary. How the Federal Circuit and Family Court ultimately deals with trust assets depends on the nature of the Trust, and in particular, who holds the office of Appointor, Trustee and Guardian.
How can we help?
Our firm are Specialist Wills Estate Lawyers who are experts in testamentary trusts. We also have a Chartered Tax Advisor accredited with the Tax Institute of Australia to advise in respect of taxation issues arising from testamentary trusts.
If you want to discuss including a testamentary trust in your Will, or are a beneficiary of an existing testamentary trust and want advice, please call our office on 03 9646 4477.
