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Why do you need a testamentary trust will?

We’re often asked by clients about getting testamentary trust wills. Some clients have been advised by their financial advisers to get testamentary trust wills in place but don’t have a solid understanding of what they are and what they do that a basic will doesn’t. Others have heard of testamentary trust wills because their good friends have one and they want to make sure their will provides all legal protections. Wonder no more, we’ll explain testamentary trusts and their benefits.

What is a testamentary trust?

Testamentary trusts are wills that not only deal with all the aspects of a basic wills (executors, beneficiaries, how the estate is distributed) but also has a trust or several trusts created as part of the document. This trust is not like a family trust or other trust you might set up with your accountant during your lifetime, this trust only activates on your death if you have a testamentary trust will. Because it only activates on your passing, there are special reasons as to why they can be beneficial.

Testamentary trusts provide asset protection

When the trusts are activated under your testamentary trust will, the assets you gift to your beneficiaries won’t be held by them as individuals or in their own names; the assets will be held by the trustee for the beneficiaries of the trusts. This provides a measure of protection for the assets if there ever any issues with the beneficiary being sued or involved in a court matter that may lay claim to their assets

Testamentary trusts provide protection in family law disputes

For the same reason as testamentary trusts are good for asset protection, they can assist in protecting assets in the trusts created from being part of the assets that can be claimed under a family law  property dispute. How effective testamentary trusts are in these circumstances will depend on the structure and control of each of the testamentary trusts created under the Will.

Testamentary trusts provide tax benefits

One of the main reasons why financial advisers encourage their clients to get testamentary trust wills is the taxation benefits that their beneficiaries can benefit from, including the ability to make distributions to a wide range of beneficiaries which allows for tax effective distributions. The beneficiaries of a testamentary trust can be determined by the trustee of the trusts, within certain perimeters, which gives flexibility to make use of distributions to get tax benefits from income streaming.

Testamentary trusts give tax concessions for minors        

Unlike trusts that you may set up during your lifetime, testamentary trust wills provide significant concessional tax treatment for distributions made to minors from the trusts. Minors are taxed at penalty rates under lifetime or “inter vivos trusts” but testamentary trust wills create trusts that allow children under 18 years of age to receive income from the trusts which is taxed at ordinary adult marginal rates as well as the low income tax offset being applied to the income earned form the testamentary trusts.

Testamentary trusts benefit from marginal tax rates

Testamentary trust income can be assessed under s99 of the Income Tax Assessment Act which means the trustee is taxed at a standard adult marginal rate which also includes the tax free threshold of $18,200. Inter vivos trusts are assessed under s99A which means that a trust you create during your lifetime has the highest marginal tax rate applied for undistributed income.

Testamentary trusts provide discounts on capital gains  

Under the same s99 of the Income Tax Assessment Act which testamentary trusts can operate, the trustees of each of the beneficiary’s trusts can claim a 50% discount on capital gains tax for assets which are sold off as long as they have been held for over 12 months. Most other trusts aren’t able to benefit from this discount.

Testamentary trusts can have personal income benefits

A beneficiary under a testamentary trust will have their personal income assessed at marginal tax rates which have the benefit of the $18,200 tax free threshold. As mentioned before, a minor beneficiary of a testamentary trust will have their income classified as “excepted trust income” which means their income will be assessed at the adult marginal rates and have benefit of the tax free threshold.

Testamentary trust wills can be very useful in the right circumstances and drafted to meet your particular goals and objectives. They can last for up to 80 years and can give the flexibility and discretion to make changes to beneficiaries, distribution and even vesting of the trust during that time so your beneficiaries can receive greatest benefit from them.

If you are considering getting a testamentary trust in place we can explain how they can best be structured for your circumstances and your goals. Give us a call, send us an email at [email protected] or book in a free 10 minute chat here with a lawyer to see if it’s right for you.

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