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Why would I need a Testamentary Trust?

Wills often include provision for beneficiaries to receive their distribution from the estate via a “Testamentary Trust”. A Testamentary Trust is a trust created by a Will, where the distribution is held “on trust” for the benefit of an intended beneficiary or class of beneficiaries.

One way of constructing the Testamentary Trust is to form a Discretionary Testamentary Trust, where the class of beneficiaries eligible to benefit under the Trust includes the intended beneficiary and their relatives. The intended beneficiary usually has a substantial degree of control over the Trust, whether through also being the trustee or appointor, or whether by having a veto power with respect to certain powers.

If children under 18 receive income which has not been earned by them, that unearned income is taxed at a maximum marginal rate (subject to the tax free threshold).

However, s.102 AG(2) Income Tax Assessment Act 1936 provides an exemption where the income of a child is received from the estate of a deceased person via a Testamentary Trust. This income is subject to normal individual rates of tax.

Advantages of a Testamentary Trust:

  • income tax can be minimized;
  • capital gains tax can be minimized;
  • protection of pension entitlements;
  • protection against creditors and/or bankruptcy;
  • control of assets against spendthrift beneficiaries;
  • protecting a beneficiary from themself;
  • avoids creating life interest;
  • increased asset protection;
  • protect a beneficiary from losing their assets in the event of a marriage breakdown;
  • to distribute and split the income;
  • protect a young, disabled or irresponsible beneficiary;
  • restricted from assessing the actual capital of the trust;
  • only access income generated.

Disadvantages of a Testamentary Trust:

  • doesn’t apply to assets given away during life;
  • doesn’t apply to joint assets;
  • beneficiaries’ circumstances may change;
  • long term structure (ruling beyond the grave);
  • cost of administration;
  • complexity of the estate;
  • trustees must be wisely chosen.

Testamentary Trusts are a useful method to be considered when contemplating estate planning, however, there is no one size fits all. We are available to discuss your objectives in order to ensure that the benefits of these Trusts are obtained by your loved ones.

Our team have extensive experience in drafting Testamentary Trusts and will gladly assist you.

If you would like more information, please contact Brad Beasley on 4936 9100 or by email.

It is important to seek specific advice regarding your circumstances as this fact sheet provides general information only and does not constitute legal advice.

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