A testamentary trust can be an effective estate planning tool to provide for children, grandchildren and others in the right circumstances.

What is a Testamentary Trust?

A testamentary trust is A term often used to describe a discretionary family trust established under a will. However, it can be much more than this, in fact a testamentary trust is any trust created under a will but for simplicity, we are talking here about the more common discretionary family trust style of testamentary trust.

Key Benefits

The key aspect of testamentary trusts is that, although assets of the trust may be controlled by the intended beneficiary (or someone else nominated as the trustee), they do not form part of that beneficiary’s estate. This allows more control over the timing and amount of payments out of the estate to the beneficiaries – which can help protect assets and reduce taxes paid.

4 Great Reasons

Reason 1: Protection of assets

If the bankrupt’s inheritance is coming through a testamentary trust it can be protected from creditors. An inheritance coming through a testamentary trust is less likely to be the subject of a Family Court order in the case of a marriage break-up.

Reason 2: Drunks, gamblers, big spenders and disabled beneficiaries

A testamentary trust allows the giving of an inheritance to people who are drug or gambling addicted, mentally or physically disabled or simply spendthrifts on a controlled basis. This can help them manage their financial affairs. It can also allow an adequate fund to be set up to meet a person’s needs but so as not to affect any pension rights they may have.

Reason 3: Tax savings

There is a longstanding loophole in tax law that allows income distributed from a testamentary trust to  minor beneficiaries (under 18) to be taxed in the child’s hands at an adult’s marginal tax rates. This means if the deceased will maker has children or grandchildren under 18, they can take advantage of the full tax free threshold (currently $18,200) on distributions to them (normally the tax free threshold is only  $416 for trust distributions–anything more than this is at the highest marginal tax rate)

Also assets owned by the deceased that would have been subject to capital gains tax, CGT,  had they been sold prior to their death, can pass through their estate to the testamentary trust and onto beneficiaries with no CGT event occurring, therefore no CGT being immediately payable.

Reason 4: Flexibility

 In a testamentary trust the person that is appointed as the trustee can have the freedom to buy and sell the assets of the trust (and thereby grow the value of the trust) or move the value of the trust into more suitable assets (such as a managed fund) without causing tax issues.