A Testamentary Trust is a way for you (through a trustee) to provide a greater level of control over the distribution of your assets to your beneficiaries. These trusts may provide tax advantages to your beneficiaries and should be considered as part of your Estate Plan.
According to the ATO, a trust is ‘an obligation imposed on a person or other entity to hold property for the benefit of beneficiaries’.
A Testamentary Trust differs slightly in that it will only come into effect after you have passed away. It must be included in your Will and you can include all, or only some of your assets in the Trust. You will need to nominate a Trustee who will be responsible for distributing the assets to your beneficiaries as per your wishes. The Trustee should be someone you trust as they will have complete control over the assets and their distribution.
There are several good reasons why you might consider a Testamentary Trust.
There are certain tax advantages, for children under 18 income distributed from a Testamentary Trust is usually taxed at marginal adult rates, rather than the minor rates which could be as high as 66 cents in the dollar. For adults, the distribution of income can be managed to ensure the beneficiary does not pay a higher rate of tax than necessary.
Tax is payable on undistributed income within the Trust but not to any income paid to the beneficiaries.
Another reason for considering a Testamentary Trust is for asset protection as the Trust is protected from creditors seeking payment. This will be useful if the beneficiary works in an area where litigation rates are high, or they are in a precarious financial position and perhaps dealing with fractious family matters such as a divorce. Without a Testamentary Trust, the assets are directly paid to the beneficiary and are open to seizure by creditors.
Assets held in a Testamentary Trust are also protected against falling into the hands of those you are not close to. Imagine your partner remarries after you pass. Without a trust your assets have passed to your partner, when they remarry, the new partner (and by extension their family) are likely to benefit from your assets.
You can set out the terms of the distribution of assets in your Will. For example, you could state that the funds are to be used to provide lifetime care to a specific dependent or that funds are only to be used for educational purposes until a beneficiary reaches a certain age. You can also make provisions for those who are not financially stable, stating that they can only have access to a certain amount of funds distributed throughout the year rather than paid in a lump sum. However, you should note that the Trustee is also able to make these types of decisions and overrule your decisions.
Cost is one disadvantage, there will be ongoing administrative costs for running the Trust such as accountants’ fees. The Trustee may also pay themselves a wage for the time spent in administering the Trust.
There are also concerns around what happens to the Trust if the primary beneficiary or beneficiaries pass away, do their beneficiaries then get their share of the Trust? Consideration should be given to the ‘second generation’.
Consideration should also be given to the taxation on superannuation paid into the Trust, and capital gains tax relating to the sale of property.
It is very important that you understand that the information above is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. It is also worth noting that the Australian financial and taxation system is ever changing, and the information above may no longer be relevant. Again, we suggest seeking professional advice from a financial adviser before proceeding.