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Why you might want to consider a Testamentary Trust in your Estate Plan

By Peter Ray | October 6, 2016 | 0 Comment

Testamentary trusts are very effective estate planning tools and are becoming increasingly popular as more people become aware of their advantages.

A testamentary trust is any trust established under a will, but the term is usually used in the context of a discretionary trust established under a will.

Why are they becoming more popular?

The increasing popularity of testamentary trusts arises from the very considerable benefits that flow from their establishment and use, including the fact that although assets in the testamentary trust may be controlled by the intended beneficiary, they do not form part of that beneficiary’s own property.  Major benefits of a testamentary trust include the ability to protect assets and to reduce tax payable by the beneficiaries from income earned from the testamentary trust providing a greater level of flexibility and control over the distribution of assets to beneficiaries.

Reasons why you should consider a testamentary trust include:

CGT benefits

Assets owned by the deceased that would have been subject to capital gains tax (CGT) had the deceased sold them before their death, can pass through their estate to a testamentary trust without a CGT event occurring.

If an asset of the deceased is a pre-CGT asset (i.e. acquired before September 1985), and by the deceased’s Will is put into a testamentary trust  the testamentary trust will have as the cost base for that asset an amount equivalent to the market value of the asset at the date of death. If the asset is a post CGT asset of the deceased, then the testamentary trust will commence with the deceased’s cost base for that asset. This is particularly important where the assets have significant unrealised capital gains. This also provides a good opportunity to “reset” the ownership of assets subject to CGT.

Take for example, where mum and dad own the shares in a company that is the corporate beneficiary of their family trust.  The shares may have a nominal cost base (more often than not, $1.00) but because of trust distributions made over a number of years (and often not paid in cash) the company and therefore the share, may have become very valuable.  All of that increased value is potentially subject to CGT if mum or dad changed the ownership of these shares during their lifetime.  However, after their death the shares can be moved to a testamentary trust and dividends from the company can then be distributed by the testamentary trust to a range of beneficiaries, tax effectively.

Income Tax advantages

Income can be distributed from a testamentary trust to infant beneficiaries (under the age of 18) and taxed in those children’s hands at adult marginal tax rates (instead of at the top marginal tax rate as would otherwise be the case).  Testamentary trusts may, over time, sell and replace the original assets received from the estate and the distributions to infant beneficiaries will continue to be taxed at (more beneficial) adult rates.

With the tax free threshold of $18,200 since 2013/14, testamentary trusts are even better vehicles for clients because children and grandchildren under the age of 18 years who receive income from a testamentary trust are taxed on that income at adult rates, and enjoy a tax free threshold of $18,200 (or $20,542 if the low income tax offset applies) and the marginal tax rates which apply to adults.

Without this special provision trust distributions to minors may only access a tax free threshold of $416 and thereafter the effective tax rate applied to the minor’s income is 66% of income up to $1,307 and 45% after $1,308, on the entire amount of income received.

Protection of assets

Testamentary trusts provide a level of protection for the assets held in the testamentary trust, including against creditors of the beneficiaries of the testamentary trust who may want to recover amounts owing to them by a beneficiary, and in the Family Law Court in the case of the property claims against a beneficiary of a testamentary trust.

Protecting ‘at risk’ beneficiaries 

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 may wish to ensure that an adequate fund is set up to meet the beneficiaries’ reasonable needs, and so as not to affect any pension rights they may have.

These people can be described as being ‘at risk’, a description that may for example include people who are drug or gambling addicted, mentally or physically disabled or simply spendthrifts who are not capable of looking after any wealth that is left to them.  For these people a testamentary trust can be managed by a trustee who should be a responsible and capable person (or people) who take action for the benefit of the ‘at risk’ person.

Summary

It is becoming much more common to steer away from the traditional husband and wife will, which provides for a husband and wife giving everything to each other and then to the children, and to replace this with one or more testamentary trusts controlled by the surviving spouse and/or children under which the spouse and children are potential beneficiaries.

If the funds in the estate justify it (and remember this may include the proceeds of life insurance policies, or superannuation), wills providing for testamentary trusts can provide that on the death of the spouse, sub-trusts come into existence for the benefit of each child and that child’s family – controlled by the child concerned.

Testamentary trusts are a very powerful and useful estate planning tool.  The flexibility of such trusts, especially if combined with a memorandum of wishes as to how the trust should be administered, can be an appropriate arrangement as well as providing a highly advantageous tax mechanism, for many years into the future.

To find out more about how testamentary trusts can benefit you, contact us on (08) 97920 920 or email admin@sleeanderson.com.au.


The contents of this publication are not legal advice to anybody who receives it and should not be treated as legal advice.  You should not take any action following reading this publication without legal advice concerning its application or relevance to your own circumstances.

Filed under: Estate Planning

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