Testamentary Trust – What Is It, and Should I Have One?

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A Testamentary Trust is a trust established under a Will that can be set up with the assistance of accountants in Sydney, and it only comes into operation after the death of the person who has made the will (the Willmaker).

There are many factors to consider in deciding whether to set one up. Our article covers a few of these factors.

The key factors to consider in deciding whether to set up a testamentary trust are:

  • The size of the estate/assets – are they large enough to warrant creating a more complex structure?
  • The need to protect the assets when in the primary beneficiary’s hands – is there a potential bankruptcy risk or marital problems for the beneficiaries?
  • The beneficiary’s personal needs – are there beneficiaries under 18 that need funding for their education and well-being?

The advantages of a testamentary trust are:

  • Income tax savings – beneficiaries under 18 years of age are taxed at regular adult tax rates on certain testamentary trust income distributed to them. This means that minor beneficiaries can enjoy the benefits of the tax-free threshold and progressive tax rates without worrying about the penalty tax rate (currently at 47%).
  • Distribution flexibility – like a discretionary family trust, a testamentary trust can have the same flexibility to stream different income categories (i.e. franked dividends) to different beneficiaries.
  • Asset protection – like a discretionary trust, a beneficiary of the testamentary trust does not have proprietary rights to the assets of the trust. Therefore, it is difficult for creditors to go after the beneficiary of the trust’s assets. The same protection is also available to the trustees, as a trustee in bankruptcy does not have an entitlement or claim on the trust’s assets.
  • Protection from divorce – assets placed in a testamentary trust make it harder for the divorcing spouse or partner of a beneficiary to gain access to the assets as it is generally protected from the reach of the Family Court.
  • Protection from beneficiary – if the beneficiary has a personal problem, such as a gambling or drug addiction, a testamentary trust controlled by an independent trustee can protect the assets from the beneficiary and at the same time use the assets to provide care for the beneficiary or the beneficiary’s children,
  • Protection from new spouse or partner – if the Willmaker dies and leaves the assets to the spouse, he/she will have legal rights and enjoyment of the assets and can share or transfer those assets to their new spouse/partner. Where children are involved, it may be worthwhile considering placing the assets in the testamentary trust to provide financial assistance and care for the children in the long term while shielding the assets from the spouse’s new partner.

There are also some disadvantages of having a testamentary trust:

  • It is more expensive to set up (as part of draughting will).
  • There are ongoing annual costs to administer the testamentary trust once it is in operation.
  • CGT ramifications must be considered if you plan to place your primary residence in the trust.
  • Having property in a testamentary trust can trigger land tax issues.

Should you have any questions or want to know more about testamentary trusts, please do not hesitate to contact us.

Kreston Stanley Williamson Team

*Correct as of March 2016

*Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.

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