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A Testamentary Trust is a trust created in your Will, which only comes into existence upon your death. Given the complexities of taxation laws, family law disputes and creditor claims and given that many of us now have two significant assets, being the family home and superannuation (including life insurance), often a simple Will is not enough to protect your family.

What are the benefits of a Testamentary Trust?

There are three significant benefits of setting up a Testamentary Trust.

Taxation

A person under 18 who is a beneficiary of a Testamentary Trust will be treated, for income tax purposes, as a normal taxpayer. That means that a person under 18 can receive the tax-free threshold amount as provided for under the Tax Act .

This is in contrast to a child under the age of 18 who is the beneficiary of a Trust created during your lifetime. In this case, distributions of income to a child under a Trust are heavily taxed for any distribution exceeding a prescribed (and very low) amount.

There is also the benefit of being able to distribute income to beneficiaries of the Trust who are, during the financial year, receiving a low income and therefore, pay less tax. For instance, if a beneficiary is unemployed or currently out of employment (for example, staying at home to look after the family), then a distribution of income to that beneficiary would be very tax effective.

Wealth Protection

If one of your intended beneficiaries had, as at the date of your death, become bankrupt or soon thereafter became bankrupt, a gift directly to that beneficiary would end up in the hands of the Official Trustee in Bankruptcy. If the money is held in a Trust, then it is quarantined from a claim by the Official Trustee in Bankruptcy.

On a separate note on this aspect, a beneficiary who is a professional, or who runs their own business, would also appreciate being able to leave assets within a Trust rather than in their own names. This is because the assets are then protected from claims by creditors or from claims for breach of professional duty.

Family Law

As assets in a Trust in the nature of a Discretionary Trust are not assets of the beneficiary until the Trustee makes a determination, it can be argued that the assets within the Trust should not form part of the assets of the marriage.

However, the Family Court is a very intrusive court and, depending upon factual circumstances, the court has intervened into Trusts or has taken account of assets within the Trust when making a decision about splitting of assets between spouses.

Therefore, although setting up a Testamentary Trust is not perfect in preventing any claim by a spouse of a beneficiary, there may still be scope to isolate the assets of the Trust from any Family Court proceedings by the spouse of a beneficiary.

What are the costs of set up and administration of a Testamentary Trust?

As the Testamentary Trust is created by virtue of your Will, it only comes into existence upon your death. Therefore, unlike trusts created ‘inter vivos’ (that is, during your lifetime), there is no stamp duty payable to create the Trust. Nor is there the need to administer the Trust during your life time (administration meaning such things as tax returns, appointment of trustees and so on).

What issues should I consider when deciding to set up a Testamentary Trust?

The critical issues are:

The appointment of trustees

As the Trust may remain in existence for a considerable period, it is important to carefully consider who you want, and can trust, to be the trustee. However, even though the Trust may operate for many years, when we set it up we ensure that it allows for the resignation, retirement and appointment of trustees.

Deciding which assets should go into the Testamentary Trust

There would be a number of assets which would not be appropriate to have in the Testamentary Trust; such as household goods, motor vehicles, original artworks, and so on.  We can guide you as to what assets should go into the Testamentary Trust.

Where there are a series of Testamentary Trusts created for different members of the family, we can assist you in deciding what assets should fall into specific Testamentary Trusts for some but not all of the family members.

We would need to discuss in detail your financial circumstances and usually, we need to discuss various issues with your accountant and/or financial planner to ensure proper estate planning and due regard to the imposition of various taxes (such as Capital Gains Tax, GST and Land Tax).

We can also guide you as to changes you might consider with regard to how you hold assets, to ensure the effectiveness of the Trust.

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