Testamentary Trusts - Estate Planning Strategies
Monday 20 September, 2004
In recent years the term “Testamentary Trust” has been used to describe what is usually a Discretionary Family Trust established under a Will. Their popularity arises from the considerable benefits that can flow from their establishment under a Will. A number of these benefits arise from the fact that the assets of the Trust while they may be controlled by a potential beneficiary, do not form part of that beneficiary’s estate. This feature means that a beneficiary’s inheritance that has been provided through a Testamentary Trust can be highly beneficial in a number of circumstances.
Bankruptcy
Unfortunately, the incidence of bankruptcy in our society has increased significantly. Often a wife will guarantee her husband’s business venture and vice versa. To some extent we can all be at risk whether in traditional high risk occupations or not. However, if the bankrupt’s inheritance has been provided through a Testamentary Trust it will be protected from creditors.
Spendthrifts and People with Disabilities
It is not uncommon for people suffering a variety of disabilities to be unable to properly manage their financial affairs. At the same time, families wish to ensure that an adequate fund is set up to meet their reasonable needs. The flexibility of a Testamentary Trust, especially if combined with a Memorandum of Wishes as to how the Trust should be administered, can be an appropriate arrangement.
Taxation Advantages
Although the above features are in themselves good reasons to consider a Testamentary Trust in your Will, the major basis of their popularity is the considerable tax savings which can arise. Children under the age of 18 years who receive income from a Testamentary Trust enjoy the adult income tax free threshold and marginal tax rates which apply to adults. This is much more favourable than the tax treatment of normal family trusts. For example a beneficiary with three young children could receive $18,000.00 tax free income.
Divorce
As with creditors, an inheritance held within a Testamentary Trust is less likely to be the subject of a Family Court order in the case of a marriage breakup. It may be regarded as a financial resource and have some effect on the terms of a property settlement but this is a preferable outcome to the property being at the disposal of a Family Court order.
New Trends
Increasingly, the traditional husband and wife Will (i.e. each to each other and then to the children) is being replaced by a Testamentary Trust controlled by the surviving spouse and under which that spouse and children are potential beneficiaries. On the death of the spouse, subsequent trusts come into existence for the benefit of each child and child’s family (and would be controlled by the child concerned). Increasingly, grandparents are providing Education Trusts for their grandchildren which have the added advantage of maximising the tax free income that can be applied for the benefit of the grandchild.
Conclusion
Testamentary Trusts, while largely promoted as a tax saving mechanism have many other advantages. Their inherent flexibility makes them worthy for consideration in your overall estate planning strategies.
Author Credits
For advice and further information please contant: Paul Stephens, Nevett Ford; Phone: (03) 5331 4444; Email:pstephens@nevettford.com.au