The benefits of testamentary trusts

A testamentary trust can be a useful tool when planning your estate, particularly for high net worth individuals, business owners or those with complex circumstances, such as step and blended family situations.

A testamentary trust is written into your Will but isn’t activated until death.

Upon death, a trust is typically created for each of your beneficiaries in which they will inherit your assets (usually assets are inherited by beneficiaries in their own names).

Once this has taken place, the assets are held ‘in-trust’ for the benefit of the beneficiaries. In other words, the trust retains legal ownership of the assets to which the beneficiaries have an entitlement. The beneficiary, however, is trustee of the trust, which effectively means they have control of the assets owned by the trust and could (subject to the conditions of the trust deed) realise their entitlement at any time.

Like a family trust, a testamentary trust is a discretionary trust, which means the trustee can make income and capital distributions to beneficiaries at their discretion. For example, the trustee might decide to make an income distribution to the beneficiary in one year, but not the next.

Broadly speaking, there are 2 keys benefits provided by testamentary trusts.

The first is asset protection. As assets are not inherited by beneficiaries in their own name, they are not exposed to litigation, bankruptcy or creditors in a testamentary trust.

To illustrate, let’s assume a beneficiary had a business venture that failed and money was still owed to creditors afterwards. If the beneficiary inherited your assets in their own name, a court could order that such assets are liquidated to pay the creditors. On the other hand, if the beneficiary inherited the assets in a testamentary trust, the assets should be protected from creditors because they are legally owned by the trust, not the beneficiary. A testamentary trust can also provide protection if you are concerned about a challenge to your estate, from an ex-spouse for example. Only assets that pass to beneficiaries via your Will form part of your estate, and only assets in your estate are subject to a challenge. Assets that pass to beneficiaries via a testamentary trust are not included in your Will and do not form part of your estate. Therefore, such assets should be protected from a challenge to your estate.

The second key benefit provided by a testamentary trust is the opportunity for tax minimisation. As a testamentary trust is a discretionary trust, the trustee can decide not only when to make distributions to beneficiaries, but the amount of the distribution as well. These decisions will be determined by whichever outcome provides the most favourable tax outcome for the beneficiary. In other worlds, a testamentary trust should result in the beneficiary paying less tax with respect to income and capital gains (when the asset is sold) than if the asset was held in their own name.

Whether a testamentary trust will be appropriate for your circumstances will be determined by your assets, your personal and family situation and your desired estate planning outcomes. Estate planning is a complex area of financial planning and you should seek expert advice before having your Will drafted to include a testamentary trust.

 


This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial and tax advice prior to acting on this information.Opinions constitute our judgement at the time of issue and are subject to change. Financial Planning Expert Pty Ltd does not give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.
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