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Most clients want to keep their estate plan simple. Introducing new terminology, such as a “Testamentary Trust”, can therefore be a daunting proposition for some. Given the increasing size of deceased estates these days, being outside the comfort zone can be well worth the effort.

High property prices, superannuation death benefits and life insurance, means that the benefits of a testamentary trust (TT) are becoming more widely relevant.

In simple terms, a TT is a trust that is created by a Will. The trust only comes into existence on death, and has the effect of placing the estate on trust for beneficiaries (instead of the estate being distributed to beneficiaries directly). The most common form of TT places the beneficiary in control of their own trust and provides the power to the executor to administer the assets of the deceased (both estate and non-estate assets) to achieve an equitable distribution on an after tax basis.

The key advantages of a TT are:

  • Asset protection – as the inheritance moves into a trust, the beneficiaries do not legally own what has been left to them, rather they hold a beneficial interest in the assets. This can provide protection for beneficiaries in certain professions such as business owners, lawyers, doctors, accountants and engineers (as these people may prefer not to directly receive an inheritance), and some protection in bankruptcy and family law proceedings (if properly drafted).
  • Reducing tax – a TT provides significant tax advantages as it provides the opportunity to effectively stream income to a wide range of discretionary beneficiaries (including minors) in the most tax- efficient way. In particular, minors (i.e. children under the age of 18 years) are treated like a normal taxpayer and have the same tax free threshold as adults (currently $18,200 for the 2020 year). Therefore, income can be streamed to low-income- earning family members (including minors) with a preferential tax rate.

In short, a TT is a smart and effective estate planning tool to manage the future of hard-earned wealth which lawyers should consider when reviewing a clients’ estate planning needs.

This article was co-authored by Law Cadet Bill McLaughlin.

 

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