A testamentary trust is a trust that is created under a will and comes into effect after you die. Here are five reasons why testamentary trusts are a great structure to consider in your estate planning.

  1. Asset protection

Assets under a testamentary trust are held and managed by a trustee (as appointed by you) for the benefit of your nominated beneficiaries. As a result the beneficiaries do not own the assets of the trust, rather, they are eligible to benefit from them. This offers added protection to your beneficiaries' inheritance should a beneficiary one day come under attack from creditors, for example in a bankruptcy situation or in some cases, in a family law matter.

  1. Maintaining family wealth

A testamentary trust can be set up so that only your lineal descendants or blood relatives may benefit from the trust, meaning that your family wealth is protected for future generations.

  1. Protecting vulnerable beneficiaries

In the same way that testamentary trusts can protect the assets of the trust, they can also protect the nominated beneficiaries. This can be achieved by appointing an independent person to be the trustee of the trust rather than the beneficiaries themselves. By separating the aspects of control and benefit, an independent trustee can make prudent decisions for beneficiaries who are either incapable of managing their own affairs (due to spendthrift tendencies, addictions, age or disability) or are vulnerable to exploitation.

  1. Tax savings

If a beneficiary receives their inheritance in their personal name, they are taxed on any income and capital gains acquired from the investment of their inheritance at their personal marginal tax rate. However, if a beneficiary of a testamentary trust under the age of 18 years receives income from the trust, they are taxed at adult rates, rather than the penalty rates that apply should income be received by a child from a normal discretionary trust established during your lifetime.

  1. Tax flexibility

By using a discretionary testamentary trust, any income gains, capital gains and franked dividends earned from your estate assets after you die, can be distributed among your family beneficiaries each year in the most tax-efficient way, such as by distributing to your beneficiaries who are not earning any income or to those who are earning in the lower tax brackets.

For further information please contact:

Angela Harvey, Partner
Phone: +61 2 9233 5544

Elizabeth Santifort, Associate

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.