Should you consider a testamentary trust?
This article provides an overview of testamentary trusts and how they can be utilised in estate planning.
Do you have concerns about what will happen to your loved ones after you pass away?
If so, a testamentary trust may be a helpful solution. A testamentary trust is a type of trust that is established in a Will and only becomes effective upon your death. A Will can include multiple testamentary trusts and they can cover all or part of your estate. You can create a testamentary trust to benefit your entire family or create separate trusts for each individual beneficiary.
The person or entity who is responsible for managing a testamentary trust can be a beneficiary, lawyer, trust company, or someone else. The trustee is chosen to oversee the trust until a specified time, such as when the beneficiaries reach a specific age or marriage status. The trustee has discretion over the trust and may receive a letter of wishes in some cases.
A testamentary trust can provide tax benefits and protect assets, particularly when children or beneficiaries may not be able to manage their inheritance effectively. It allows for regular income and capital access for children and grandchildren. It is often used when potential life insurance settlements may be larger than the current estate, and when beneficiaries are young or unable to manage their inheritance.
Tax Rates
Generally, children under 18 who earn income from sources other than a deceased estate are subject to higher tax rates. However, if their income is from a deceased estate, they are eligible for the low-income rebate and taxed at the normal rate.
By establishing a testamentary trust, the income from the estate, including capital gains and franked dividends, can be distributed among the beneficiaries in a tax-efficient way.
Protection of Assets
If a testamentary trust is set up properly, it can also prevent beneficiaries from having unrestricted access to the capital from your estate. This may be especially useful in situations such as:
- The beneficiary is disabled and unable to manage their own finances.
- The beneficiary may be financially irresponsible or you want to protect their inheritance from potential marriage breakdown.
- You are concerned that your spouse or ex-spouse may not manage the estate in the best interests of your children.
- You want to ensure your children receive a defined portion of your estate in the event of your spouse remarrying.
Before deciding to include a testamentary trust in your Will, it is important to weigh the potential advantages and disadvantages. The terms of the trust are established in your Will, so it is crucial to seek professional legal advice when drafting your Will and to thoroughly discuss your needs with your lawyer.
