A Testamentary Trust Will can help your beneficiaries to minimise tax and protect their inheritance. These Wills do not cost much more and many of our clients enjoy the benefits – read their Reviews. Call us on a no obligation basis to discuss testamentary trust wills and your estate plan.
Answers to Some Common Questions about Testamentary Trust Wills
- What is a Testamentary Trust Will?
- Who Would Control the Testamentary Trust?
- How Does a Testamentary Trust Reduce Tax Liability?
- How Does a Testamentary Trust Protect Estate Assets?
- How Much Does a Testamentary Trust Will Cost?
What is a Testamentary Trust Will?
A Testamentary Trust Will is a Will that creates a Trust (or Trusts) upon the death of the Will maker.
Unlike a family trust which comes into effect immediately upon signing the trust deed, a testamentary trust has no effect until the death of the will maker.
In a simple Will the Will maker gifts assets directly to the beneficiary whereas in a Testamentary Trust Will the Will maker gifts the assets to a Trustee of a Trust that is created in the Will. The Trustee will hold the assets on trust for the benefit of a range of potential beneficiaries. In most Testamentary Trusts the Trustee will have discretion as to which beneficiary receives income and/or capital from the Trust Fund. In that way the Trustee can direct taxable income to the beneficiaries that will pay the least income tax.
In certain situations the beneficiaries of a testamentary trust would be able to save many thousands of dollars in tax every year.
Who Would Control The Testamentary Trust?
If you want to set up a separate Testamentary Trust for each of your adult children, it is likely that you would appoint each child as trustee of their own trust. Alternatively you could appoint someone else such as your executor until your child attains a certain age.
Generally each trust would have a Primary Beneficiary and that person would also be the Trustee. All other potential beneficiaries would in some way be related to the Primary Beneficiary. For example, if the Primary Beneficiary was your son, then the other beneficiaries may include his spouse, their children and their grandchildren. None of the potential beneficiaries would be entitled to any part of the estate assets as your son would have absolute control of the trust.
Provided that you are survived by a spouse or dependant child it is usually a good idea to ensure your superannuation goes directly to them via a binding death nomination. Find out more
How Does a Testamentary Trust Reduce Tax Liability?
The Trustee of the Testamentary Trust would normally distribute all income in each financial year and as such the trust itself would pay no tax. Each beneficiary would be liable to account to the ATO for the income they received from the Trust.
The Trustee would generally distribute income to General Beneficiaries of the trust who had the lowest income. Unlike the situation with family trusts (where infant beneficiaries are only entitled to $416 pa income tax free and then start paying 45 cents in the dollar!), infant beneficiaries of a Testamentary Trust are treated like adults for tax purposes (being entitled to $18,200 pa before paying tax at the lowest marginal rate of just 19 cents in the dollar). Obviously this money can be used to pay expenses associated with raising a child rather than your after tax dollars.
An example is set out below where the adult beneficiary David is married to Sue who is the full-time carer of their infant children Alex and Chris. David’s annual salary is $80,000 and so any further income will be taxed at 37 cents in the dollar :
- Scenario 1 (No Trust): David’s father dies and leaves David $1,000,000. David invests his inheritance and receives an annual income of $50,000. David will pay $18,500 each year in additional tax; or
- Scenario 2 (Testamentary Trust): David’s father dies and leaves David $1,000,000 via a Testamentary Trust which David controls. Each of David, Sue, Alex and Chris are potential beneficiaries of the Trust. David distributes the sum of $16,666.66 to each of Sue, Alex and Chris . The money is used to pay normal family living expenses of each person and because the beneficiaries have no other income there is no tax payable saving David and his family $18,500 each year!
How Does a Testamentary Trust Protect Estate Assets?
The assets of any trust (including a Testamentary Trust) do not beneficially belong to the Trustee. The Trustee only holds those assets on trust for the benefit of the potential class of beneficiaries in the trust. If the Trustee is involved in a messy matrimonial split, the assets in the Trust Fund are not available for distribution between the husband and wife. Similarly if the Trustee is sued by a business partner, the assets in the Trust Fund are safe. The premise is that the Trust Fund assets are controlled by the Trustee but do not belong to the Trustee.
How Much Does a Testamentary Trust Will Cost?
Most Testamentary Trust Wills only cost $295 plus GST more than a standard Will. There is usually no extra charge for having multiple trusts (say one for each child) in the one Will.
Testamentary trusts are an excellent estate planning tool that should be considered for all clients making a Will irrespective of their financial position. If you are considering a Testamentary Trust as part of your estate plan please Contact either Danny Beger or Bree Burns on 8362 6400 to discuss on a no obligation basis.
Read our Client Reviews and then talk to us about testamentary trust wills on a no obligation basis.