So what is a testamentary trust and why do you need one? Basically a testamentary trust is a trust created by your Will that does not come into effect until after your death.
A testamentary discretionary trust has a trustee (or trustees), a range of potential beneficiaries (for example, spouse, children, grandchildren) and can have an appointor (for instance, the spouse) who controls the trustee/s. It is the trustee who determines which of the beneficiaries, if any, receive any income or capital from the testamentary trust and also the amount of any income or capital they are to receive.
Unlike assets in superannuation funds, testamentary trust assets can be removed from the trust, borrowed or used as security. There are no requirements for a spread of investments or audited accounts and a trustee of a discretionary trust can act in a purely self-interested manner.
The significant advantage of a testamentary trust is that the assets are owned by one person/s, the trustee, and the benefit of the income and capital of the trust passes to another person/s, the beneficiaries.
This separation of control and benefit allows testamentary trusts to protect assets from any legal action involving the beneficiaries and/or misuse of those assets. If you are involved in a ‘risk’ occupation, where you might be sued and want to protect your own assets, you might consider having the Wills of your parents and spouse establish testamentary trusts for you rather than inheriting assets personally.
If an intended beneficiary faces bankruptcy, an inheritance for that beneficiary through a testamentary trust will not form part of the beneficiary’s estate for bankruptcy purposes.
The main tax advantage of using a discretionary, testamentary trust is that any income, capital gains and franked dividends can be distributed among all your family beneficiaries each year in the most tax-efficient way. A trust does not have to pay income tax on income that is distributed to the beneficiaries, but does have to pay tax on undistributed income. The trustee is free to distribute trust income to as many beneficiaries as possible, and in proportions that take best advantage of those beneficiaries’ personal marginal tax rates. The beneficiaries then pay the tax on distributions made to them.
There may be advantages for beneficiaries who may be eligible for a pension as the assets of a testamentary trust are not currently taken into account in establishing pension eligibility under the
current means tested pension rules. However, income from the trust is taken into account for income test purposes.
We see the Testamentary Trust as a cost effective way of securing your estate for the benefit of your family. By acting now you will ensure your legacy protects them for generations.