Do you worry about what will happen to your family when you pass away?
If so, a ‘testamentary trust’ may be the answer. It is established as an outcome of a will and only comes into force in the event of your death. The major benefits of such a trust are taxation advantages and protection of the assets where children are involved, or where you may be concerned about the beneficiaries’ management of their inheritance. A testamentary trust means you know your children and grandchildren can have access to a regular income, along with capital (if appropriate).
The trustee can be one or more of the beneficiaries, a legal professional, a trustee company or other person.
There is no limit to the number of testamentary trusts that may be established. You can create one to cover the whole family or a separate one for each beneficiary.
Generally, children under 18 are subject to penalty rates of tax on unearned income. However, where their income is received from a deceased estate normal tax rates apply, including the low-income rebate, if applicable.
Using a testamentary trust means that all income from the estate, including capital gains and franked dividends, may be distributed amongst the beneficiaries in the most tax-effective manner.
Protection of Assets
A testamentary trust, if structured correctly, may also prevent beneficiaries from having unlimited access to the capital from the estate. This may be of particular benefit where:
- you have a beneficiary who is disabled and unable to manage their own affairs;
- you believe a beneficiary may be financially irresponsible or you wish to protect their inheritance in the event of marriage breakdown;
- you do not trust your spouse or ex-spouse to manage the estate in the best interests of your children;
- you wish to ensure your children receive a defined part of the estate in the event of a surviving spouse remarrying.
The terms of the trust are set out in your will and it is therefore important to have professional legal advice in the preparation of your will and to discuss your needs fully with your financial adviser.