Publications

Fleming Muntz publishes regular updates on recent cases and developing legal topics for referring accountants, financial planners and property agents. Please contact us if you would like to receive these updates by email

Testamentary Trusts

Download

1/05/2007
  • What is a testamentary trust?
  • Why is it used?
  • What assets make up the trust?
  • Are there alternatives?
  • New trends

 

What is a testamentary trust?

A “testamentary trust” usually refers to a discretionary family trust established by your will after death, rather than by a deed during your lifetime.

Why is it used?

Most commonly, clients create a testamentary trust in their will because they can reduce – often significantly – the amount of tax that beneficiaries pay.

However, it can also be set up so that a beneficiary receives money from the testamentary trust fund, without actually “owning” or controlling it.  This can be useful in several circumstances, including:

  • Bankruptcy of a beneficiary
  • Spendthrift beneficiaries
  • Beneficiaries with special needs

These advantages are discussed in more detail below.

Taxation advantages

There are two ways that a testamentary trust can reduce the amount of tax paid by your beneficiaries.

  • The first is the same advantage enjoyed by ordinary family trusts: income can be split between different beneficiaries to manage the total tax payable.
  • The second is exclusive to trusts established by your will and means that significantly more income can be distributed to children or grandchildren under 18 years of age tax-free or at low rates of tax.

For example, consider what would happen if you died leaving a dependent spouse, three infant children and an estate of $500,000.00 that earned income at 8%, or $40,000.00, pa.

Compared with a simple gift to your spouse, a carefully administered testamentary trust could save your family over $6,000.00 each year, giving them an extra $120.00 per week.  This benefit could carry on for many years.

Bankruptcy

Unfortunately, bankruptcy is not uncommon.  People in some occupations accept a high risk of bankruptcy; in other cases one spouse will guarantee the other’s business debts and be liable when the business fails.  However, we can all be at risk to a greater or lesser extent simply by driving on the road or entertaining people in our home.

If one of your beneficiaries becomes bankrupt, but has received an inheritance through a testamentary trust rather than directly, it will generally be protected from creditors.

Spendthrift beneficiaries

Sometimes people are concerned that a beneficiary would squander an inheritance unwisely.  This can happen for a variety of reasons and can be permanent or temporary.

A carefully prepared testamentary trust placed under the control of a family member or friend can allow your beneficiary to enjoy the benefits of the inheritance, without being able to waste the entire amount.

Beneficiaries with special needs

It is not uncommon that people with special needs are unable to manage their own financial affairs.  If you want to ensure that the person with special needs will be well cared for, the flexibility of a testamentary trust – especially if combined with a clear recital of your wishes – can offer an effective solution.

What assets make up the trust?

You decide what assets make up the trust when you make your will.  It need not be your entire estate, but can only be assets that you actually own or which come to your estate.

For instance, jointly-owned properties will automatically pass to the survivor, while life insurance and superannuation proceeds will only go to your estate if you have specifically said so.  A careful review of your assets will help you understand what can become part of the trust.


 

Important fine print

This update is for general information only. It is not a complete guide to the area of law. Competent advice should be obtained before taking any action.

We resent unwanted email as much as anyone – if you would prefer not to receive any further updates, please telephone us on (02) 6021 2222 or email to fmlaw@flemingmuntz.com.au.