Incorporate a Testamentary Trust in your Will

There are tax, control and other advantages available through testamentary trusts that make them an effective estate planning tool. What is a Testamentary Trust? Testamentary trusts are simply trusts created by a Will to provide a greater level of control over the distribution of assets to beneficiaries. They do not come into effect until after the will-maker’s death. There are tax, control and other advantages available through testamentary trusts that make them an effective estate planning tool. The incorporation of testamentary trusts into a Will is not relevant to every situation but in many cases they offer valuable advantages over standard Wills. Under the testamentary trust, the trustee of the testamentary trust will hold the assets on trust according to the terms of the trust specified in the Will. The beneficiaries of the trust will have the beneficial title to the assets. This structure provides a greater level of control over the distribution of the assets to the beneficiaries and in some cases also provides tax advantages. Reasons to incorporate testamentary trusts in your Will The main benefits of testamentary trusts are their ability to protect assets, take greater control and reduce tax paid by beneficiaries from inheritance earnings. They can provide a family Will benefit for generations. 1. Reducing tax There may be significant tax advantages in taking an inheritance through a testamentary trust, particularly where the beneficiary has: • A high personal marginal tax rate • A partner on a lower income • Minor children; and/or • Children or grandchildren with no, or lower taxable income. Capital Gains Tax can also be streamed to one or more beneficiaries who are able to take better advantage of the five year averaging rule or CGT losses. Stamp duty on transfers of assets may also be reduced. 2. Superannuation and Insurance Proceeds Testamentary trusts can deal with any super or life insurance proceeds payable on your death in a more tax effective manner. Without testamentary trusts, tax of up to 31.5% (usually 16.5%) may apply to the full value of your super payout as a result of your death. However, a testamentary trust can provide the maximum flexibility to deal with any super paid to your Estate, so as to further maintain the preferential tax status of the proceeds. 3. Wealth Protection – Creditors and Family Law Considerations Testamentary trusts can help protect your assets when they pass to your beneficiaries. Assets that pass directly to a beneficiary immediately become available to any person who makes a claim against that beneficiary. This includes the creditors of a beneficiary in financial difficulty, or an estranged spouse or other relatives of that beneficiary. If instead the assets pass into a testamentary trust, the assets benefit from a higher level of protection from such claims. Testamentary trusts can also provide additional on-going control over the assets. 4. Incapacity In the event that a beneficiary is temporarily incapacitated, testamentary trusts can enable the assets to be managed by the family or professionals for the benefit of the beneficiary rather than having a portion of the estate controlled by an external agency. 5. Maintaining assets within your lineal descendants Where a lineal descendants testamentary trust is created, it can be used to give the spouse control over the annual income from the assets (and possibly some capital), but at the same time provide that the assets will ultimately pass to your children (and in turn your grandchildren, ie down your blood line). 6. Staggering payments to beneficiaries over time Testamentary trusts can provide a high level of control and certainty as to when a child gains access to particular assets – and for what purpose. Staggering when your children receive assets also gives them a ‘second chance’ if they make financial mistakes earlier in life. They need not lose their inheritance all at once. 7. Reduced likelihood of claims against the estate When assets are given ‘outright’ to particular beneficiaries, it is relatively easy for a disgruntled beneficiary to prove they have not been adequately provided for. However, a testamentary trust does not have a single beneficiary – but rather a range of ‘potential beneficiaries’ – which can be structured to include a potentially disgruntled beneficiary. It then becomes significantly more difficult for such a disgruntled beneficiary to bring a claim until the trust has been fully administered. Should you have any queries or require more information, please contact our team on (07) 3223 6000 or email

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