In speaking to our clients about their Wills and estate planning, clients will often express a sentiment that they want to keep things “simple.” By this statement, clients often mean that if they have a spouse then they want to leave everything to their spouse and should their spouse not survive them then they want their estate assets to be left equally between their children.
This type of “simple” Will arrangement may not be appropriate or the best outcome for some clients.
We are seeing a larger number of our clients explore the appropriateness of having a Will that incorporates a testamentary trust.
Main Advantages of Testamentary Trusts
Under “simple” Wills, when the deceased’s estate would be distributed to the beneficiaries. As the distributed assets become the personal property of the beneficiaries they are unprotected against any business and/or relationship risks.
One of the main advantages of testamentary trusts is that they offer significant asset protection. The estate’s assets are distributed to the trustee of the testamentary trust and become assets of the testamentary trust and not of the beneficiaries of the testamentary trust. The trustee will be the legal owner of all assets of the testamentary trust.
Creditors pursuing a person who is a beneficiary of a testamentary trust generally will not be able to access the assets as these assets are not owned personally by the beneficiary. A beneficiary of the testamentary trust generally only has a right to ensure that the testamentary trust is properly administered which is not a right that can vest in the trustee of bankruptcy. In certain situations, testamentary trusts may also offer protection from family law claims (e.g. where a beneficiary is getting divorced).
The other main advantage is that testamentary trusts offer tax planning opportunities in relation to minor beneficiaries and tax flexibility.
Beneficiaries under the age of 18 years are taxed at normal adult tax rates and not at penalty tax rates that otherwise apply to them. They receive the benefit of the progressive adult taxation rates, including the adult tax-free threshold.
A testamentary trust generally provides for discretion as to the amount and timing of income distributions from the testamentary trust. By including a range of beneficiaries the trustee of the testamentary trust would be able to distribute income earned by the trust in a tax effective manner. For example the trustee may distribute income to adult beneficiaries whose marginal tax rate is low.
If you wish to discuss testamentary trusts in more detail or your Wills enquiry generally, please contact:
Terry Doust
TerryD@matthewsfolbigg.com.au
Mimi Su
MimiS@matthewsfolbigg.com.au
