The modern will differs from the traditional will in that beneficiary controlled testamentary trusts (“Testamentary Trusts”) are widely used in modern wills because of the taxation and asset protection advantages they offer compared to a traditional will.
A Testamentary Trust is a trust established by a will. It can be optional (the beneficiary can choose not to use it), discretionary (the beneficiary decides who will benefit) or a fixed trust, or a combination of these.
A Testamentary Trust can live for 80 years from your death to provide flexibility, asset protection and taxation advantages for the estate’s primary beneficiary/ies.
A primary beneficiary has the power to decide to:
- Use the trust for all, part or none of the beneficiary’s inheritance;
- Wind up the trust at any time; or
- Pass control of the trust in accordance with the primary beneficiary’s own will
Advantages of Testamentary Trusts
Family law Protection
A Testamentary Trust may provide some limited protection for a beneficiary who is experiencing family law difficulties.
By providing for a beneficiary’s entitlement to be held in a Testamentary Trust, the primary beneficiary can isolate estate entitlements from personal assets. This may protect his/her estate entitlements from family law property proceedings.
Protection from Claims and Insolvency
A Testamentary Trust can give protection from the repercussions of insolvency and other potential liabilities.
Assets that pass to a Testamentary Trust from an estate are held for the nominated primary beneficiary until the trustee elects to distribute them. The assets are not owned personally by the beneficiary and therefore do not form part of the beneficiary’s personal estate. A creditor or other person claiming against the beneficiary, therefore, cannot get the assets held in the trust.
Significant income tax savings for beneficiaries
Generally, minor children are subject to penalty rates of tax on unearned income. The tax-free threshold extends to a maximum of $416 ($643 including the low income rebate) after which a penalty rate of tax applies to income up to $1,445 and the top marginal tax rate on the balance.
This taxation regime is subject to some exceptions, one of which relates specifically to income generated by a trust that is created by will or codicil.
Penalty rates of tax do not apply to “excepted trust income”, which includes assessable income of a trust estate that resulted from a will, codicil or intestacy, or a Court modification of a will, codicil or intestacy (ITAA36 sec 102AG). When combined with a carefully drafted Testamentary Trust, this allows for the tax-effective treatment of estate income.
A Testamentary Trust allows for the splitting of the income generated by the trust among the discretionary beneficiaries of the trust.
The trustee of the Testamentary Trust has complete discretion to determine who receives the income of the Testamentary Trust. The trustee may determine to distribute income to the primary beneficiary or to any one or more of the discretionary beneficiaries of the trust.
Tax is paid on the income of the trust at the marginal tax rate of the beneficiaries who receive it. Therefore, by selecting beneficiaries on low marginal tax rates, the trustee can minimise the taxation liability of the trust. The trustee can choose to distribute income to minor beneficiaries of the trust with each beneficiary being able to receive over $6,000 of income tax-free.
The trustee can also distribute income from the trust to charitable and religious beneficiaries. As many such beneficiaries have tax deductibility status or are tax exempt, no tax is paid on allocations to such organisations.
Significant capital gains tax savings for beneficiaries
A Testamentary Trust can minimise the incidence of CGT liability if an asset of the Testamentary Trust is subsequently sold.
The trustee can select which of the discretionary beneficiaries of the trust should take the capital gain. By choosing to distribute the capital gain to a beneficiary on a low or nil income, the capital gains tax liability can be significantly reduced.
By holding the assets of an estate within a trust, the beneficiaries may defer the sale of assets (and therefore capital gains tax) until later when more numerous beneficiaries come into existence. Tax deferred is tax saved.
Flexibility and Security
A will which includes provision for a Testamentary Trust does everything a traditional will does, but it gives your beneficiaries much more flexibility in how they receive their inheritance—potentially reducing tax, and protecting assets.
A Testamentary Trust, for example, could enable your beneficiaries to put their inheritance in the names of their children, or place part of their inheritance in their partner’s name. A Testamentary Trust gives them the power to decide how to invest their trust funds.
A Testamentary Trust will gives you and your beneficiaries maximum flexibility and security.
What it costs
Please contact Next Generation Estate Planning Lawyers to discuss your particular requirements. We will explain what we will do for you, how long it is likely to take, and give you a costs estimate. There will be no charge for the first consultation.
Completing our estate planning questionnaire will help us save you time and money when preparing your modern will, power of attorney and guardianship deed.