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Testamentary Trust Wills are becoming an increasingly important method of family asset protection.

If you make a simple Will, your beneficiaries will inherit your assets in their personal names. However, if your Will is drafted to establish a Testamentary Trust on your death, your beneficiaries will inherit assets through 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 Appointor, who has the power to add or remove Trustees and beneficiaries. 

Testamentary trusts provide five main advantages:

1. 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” by the Family Court during a property settlement. This means that part of your beneficiary’s inheritance may be paid to that beneficiary’s ex-spouse. If assets are held in a Testamentary Trust, it is more difficult for them to be included in any property settlement.

2. Income Splitting Advantages

Testamentary Trusts can allow income distributions to multiple beneficiaries, which can reduce taxation payable. 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 any capital losses.

3. Tax Advantages when Distributing Income to Minors

A Testamentary Trust naming 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. For example, as the current tax-free threshold is $18,200.00, your beneficiaries could make distributions of income from the Testamentary Trust each year up to $18,199.00 to each of their children or grandchildren aged under 18, tax-free. 

4. 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 had a gambling or drug addiction 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.

5. 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 any questions in relation to this topic or any other Estate Planning matter, please call us on 1300 727 813 or email us.

Related articles:
- Having Problems With Your Son-In-Law? Why A Testamentary Trust Could Help
- New Power Of Attorney Forms

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