Estate Planning

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Testamentary trust wills are becoming an increasingly common method of family asset protection. If you make a simple will, your beneficiaries will inherit your assets in their personal names. If you have a testamentary trust in your will, when you pass away your assets will be held in one or more trusts. These trusts hold your assets for your beneficiaries and are controlled by your appointed trustees, who make distributions to your nominated beneficiaries. In your will you will also name an appointer, with the power to add or remove trustees and beneficiaries.


Testamentary trusts provide five main advantages:


Asset Protection in Family Breakdowns

If a beneficiary is in the midst of a relationship breakdown when you pass away, any assets that they inherit personally may be included as part of the relationship’s “pool of assets” when it comes to a Family Court settlement. This means that part of your beneficiary’s inheritance may be paid to that beneficiary’s ex-spouse.  Holding assets in a testamentary trust may provide extra protection for your beneficiary’s inherited assets. 


Income Splitting Advantages

Testamentary trusts can allow income distributions to multiple beneficiaries which can reduce taxation. Different types of income may be distributed to different beneficiaries. For example, if the trust makes a capital gain, this gain can be distributed to a beneficiary who has made capital loss.


Tax Advantages when Distributing Income to Minors

A testamentary trust naming all future generations of your family as beneficiaries provides significant tax advantages when distributing income to minors. Distributions made to minors from ordinary trusts are heavily taxed, but distributions made from testamentary trusts are taxed at adult rates. This benefit has become more apparent since the recent rise in the tax-free threshold to $18,200. Your beneficiaries can now make distributions each year of $18,199 to each of their children or grandchildren aged under 18, tax-free.


Asset Protection for Vulnerable Beneficiaries

Testamentary trusts provide protection of assets for ‘vulnerable’ beneficiaries. A vulnerable beneficiary may be someone who is likely to ‘waste’ any inheritance they receive. For example, if one of your beneficiaries was a gambling addict and inherited a large sum of money, it may be frittered away very quickly. If the money is held in a testamentary trust, the trustee may make small periodic distributions to that beneficiary.


Asset Protection for ‘At Risk’ Beneficiaries

An ‘at risk’ beneficiary can refer to someone who does not want to inherit assets in their personal name. These people are usually professionals who, for taxation purposes, have structures in place (e.g. companies) to ensure that they do not own assets in their name. ‘At risk’ beneficiaries also include people who are facing bankruptcy, in which case inherited assets may be lost to that beneficiary’s creditors.


For information on making a testamentary trust will, contact Rankin Ellison Lawyers on 1300 727 813.


Sydney: 02 8297 5900 Newcastle: 02 4929 9333  

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