Planning for your death is understandably not something most people want to think about – and the tax consequences even less so – but it is advisable to be prepared as the result can affect your loved ones dearly. Protecting your estate is one of the few things you can do to help them through a difficult time, and a testamentary trust can be an effective tool to assist.
What is a Testamentary Trust?
Generally speaking, a testamentary trust is one that it is created as part of an individual’s will. When the creator of the will dies, the nominated beneficiaries have the option of using the trust that is written into the Will, as opposed to accepting their inheritance personally in their own right. The trust comes into existence when some of the nominated assets are transferred into the testamentary trust. A trustee is appointed who is responsible for managing the trust and the assets for the beneficiaries as directed by the will. The trust decision must be made before any assets are distributed from the estate.
What are the benefits of a Testamentary Trust?
A testamentary trust can be used to your advantage in numerous circumstances. Some of the main benefits are:
- Tax effectiveness – Where the testamentary trust is discretionary, the income can be applied for and distributed to a range of beneficiaries, which can lower the tax paid on investment income and capital gains made by the trust, compared to investments held by the individual. Further to this, beneficiaries under 18 will not pay tax at the penalty rates that would normally apply on investment income if they held the assets themselves.
- Asset protection  – The assets of the estate form part of the trust, providing a higher level of protection from bankruptcy and family law claims brought against a beneficiary in the future.
- Protecting ‘at risk’ beneficiaries – The trust may be set up in a way to meet the reasonable needs of beneficiaries who are vulnerable because of their age, intellectual or physical disability or who are otherwise incapable of managing his or her affairs.
Testamentary trusts can be a very effective estate planning tool to assist in providing for spouses, children and grandchildren. They provide good flexibility for beneficiaries of your estate and are becoming increasingly popular as more people become aware of their advantages, particularly when they can be used to assist with funding school fees or other living costs for the next generations without directly passing on the assets.
A qualified legal practitioner needs to prepare a will, however accountants and financial advisors can assist with discussing estate planning strategies and options. Accru offers a full range of business services to help plan your estate. Please contact your Accru office if you require further information or assistance.
By Nicholas Gray, Accru Melbourne