What is a Testamentary Trust?
As the name implies, these are trusts which only take effect upon the death of the testator. Normally, the terms of the trust are set out in the testator’s will and are often established where the testator wishes to provide for their children who have yet to reach their adulthood or are handicapped.
- Testamentary Trusts are an important way of ensuring your children obtain the maximum potential from your inheritance to them.
- Properly drafted Wills can protect children from relationship breakdowns.
- You can protect your beneficiaries from business and investment risk.
- You can ensure children in their minority are not exposed to penalty tax rates.
- You can properly deal with life insurance payouts and superannuation.
- You can prevent possible capital gains on sale of your primary residence, and minimize other tax liability.
- You can precisely provide for incapacitated beneficiaries and those otherwise in crisis.
- generally speaking, an estate must have income-generating assets valued in excess of $500,000 for the taxation benefits to be significant. In determining the size of an estate the following issues should be considered:
1) jointly owned assets do not form part of the Testator’s estate as they will pass by survivorship and not through the Testator’s Will;
2) where the Testator has nominated a beneficiary under a life insurance policy, the proceeds will be paid to that person directly and will not form part of the Testator’s estate;
3) death benefits from a superannuation fund do not automatically form part of the member’s estate. The Trustee of the superannuation fund generally has a discretion whether to pay the benefits to the member’s estate or directly to the member’s dependents subject to any binding death nomination made by the member;
4) assets that are already held in a lifetime discretionary trust do not form part of the Testator’s estate.
- the cost of establishing a Testamentary Trust is comparable with the combined cost of establishing a lifetime discretionary trust and a Will but the more complex the trust structure, the higher the initial set-up fees (which are not tax deductible). in addition to the initial set-up fees there will be ongoing, annual accounting together with other professional (e.g. financial advice) and compliance fees.
- if the Trustee distributes income to Beneficiaries in order to arrange the most tax effective scenario, some Beneficiaries may inherit more than the Testator would have wished simply because they are in a low tax bracket.
- complexity and formality of the structure can be a headache. For example, minutes are required for each Trustee resolution. If the Trustee is not the primary Beneficiary, a Beneficiary must ask a Trustee, if e.g. they would like a large distribution for a major purchase or almost any kind of unusual event, because they are not controlling the underlying assets.
- since changes to the Social Security rules in 2002 the whole of the assets of a trust can be counted as belonging to a Beneficiary on a pension or other social security means tested benefits.
- subject to the terms of the trust, retaining the main residence in a Testamentary Trust may result in a loss of the CGT exemption. Land Tax consequences would also need to be considered.
- as with all discretionary structures, much will depend on the decisions taken by the person in ultimate control, in this case the Trustee of the Testamentary Trust. This can be off-putting for certain Testators who prefer certainty over flexibility.