Testamentary Trust

---

A Traditional or simple Will provides a straightforward way to manage your estate. It allows you to:

1. Appoint an executor to carry out the provisions of your Will.
2. Appoint a guardian to care for any minor children.
3. Make specific gifts to individuals or charities.
4. Distribute the remainder of your estate.
5. Name alternative beneficiaries in case your primary beneficiary predeceases you.

While a Traditional Will is effective, it lacks flexibility. Beneficiaries of a Traditional Will must either accept their inheritance in their own name or refuse it entirely. This lack of choice can lead to tax inefficiencies and other complications.

A Testamentary Trust is a trust established within a Will, which only comes into effect upon the Will-maker’s death. Until that time, the Will remains changeable and has no legal effect.

A Testamentary Trust Will offers all the benefits of a Traditional Will while providing beneficiaries with greater flexibility and protection.

A Testamentary Trust provides beneficiaries with the ability to:

• Distribute income and realised capital gains among a range of beneficiaries to achieve the most favourable tax outcome.
• Allow income received by minor children to be taxed at normal marginal rates instead of the top marginal rate, potentially saving up to $20,542 per child annually.

• Keep inheritances separate from matrimonial property, ensuring that an adult child’s inheritance is not accessible to their former spouse in the event of a Family Law property dispute.
• Shield assets from creditors in cases where the beneficiary faces legal action or bankruptcy.

• Beneficiaries can choose to use the trust or wind it up if they are old enough to make that decision.

Beneficiaries who are of legal age can have full control over their trust, including:

1. Deciding who receives the assets.
2. Determining how income is distributed.
3. Managing investments within the trust.
4. Deciding how long the trust remains in place.

Beneficiaries can choose to retain control of the trust, distribute assets to themselves, or transfer control to another trusted individual.

For younger children, you can specify the age at which they gain control of their trust. Until that time, the executor of your Will manages the trust and can access funds to meet the child’s needs.

You can nominate anyone to act as the trustee of a Testamentary Trust, including:

• Executors of your Will.
• Your spouse or partner.
• Your children.

The trustee holds effective control of the trust, so it is essential to choose someone you trust to act in the best interests of the beneficiaries. Multiple Testamentary Trusts can be established under a Will, with different trustees appointed for each.

If your spouse is a beneficiary of the Testamentary Trust, the trustee can distribute capital and/or income to your spouse as needed.

Beyond taxation benefits, Testamentary Trusts offer:

• Protection from Creditors: Shielding assets from creditors or litigants in professional negligence claims.
• Support for Vulnerable Beneficiaries: Safeguarding inheritances for spendthrift beneficiaries, those with intellectual impairments, or beneficiaries involved in family court property disputes.

While Testamentary Trusts offer significant benefits, there are ongoing maintenance costs, such as accounting fees for preparing trust tax returns. Factors to consider include:

• Whether the income generated by your estate justifies the cost of maintaining the trust.
• Whether there are special needs, such as a beneficiary with an intellectual impairment, that warrant the establishment of a trust.

Assets held in a Family Trust do not form part of your estate and cannot be distributed through a Testamentary Trust. If all your assets are owned by a Family Trust, establishing a Testamentary Trust may not be necessary unless you plan to wind down the Family Trust and transfer the assets to yourself.

Before deciding to establish a Testamentary Trust, it is essential to consult with your accountant, and/or financial adviser. They can help you understand the advantages and disadvantages based on your unique financial and family circumstances.

A Testamentary Trust is a powerful estate planning tool that provides flexibility, tax benefits, and asset protection for your beneficiaries. By including a Testamentary Trust in your Will, you can ensure your loved ones are supported and your legacy is preserved.

If you would like to learn more about Testamentary Trusts or discuss your estate planning needs, we encourage you to contact our team for professional advice tailored to your circumstances.