A testamentary trust can save you or your beneficiaries a lot of money when it comes to tax. They are usually used to protect assets.

A testamentary trust is created by a will in order to provide a higher level of control over the distribution of assets to beneficiaries. The main benefit of a testamentary trust is its ability to protect assets and reduce tax paid by beneficiaries from income earned from the inheritance, which also makes them an effective estate planning tool.

There are two main types of testamentary trusts; a discretionary testamentary trust and a protective testamentary trust.

If a beneficiary obtains their inheritance in their own name, they will have to pay tax on the income produced from that inheritance at their personal marginal tax rate. That asset may be at risk in family law, equally, it may reattach if the beneficiary is bankrupt. If using a testamentary trust, any income, capital gains and franked dividends can be distributed among all of your family beneficiaries in the most tax efficient way.

Tax Benefits

There can be several advantages of using a testamentary trust if the beneficiary has a high personal marginal tax rate, a partner on a lower income, minor children/grandchildren, a tax-free threshold to $20,542, or children/grandchildren with no – or lower – taxable income.

Other benefits

Not only can a testamentary trust provide tax advantages through income splitting, it can also have other benefits and advantages, some of these are set out below.

If you are concerned that your spouse may remarry and divert family assets to the new family, using a testamentary trust can ensure that your assets pass to your children, even if your surviving husband/wife remarries.shutterstock_681206938

Another advantage is that a testamentary trust can be beneficial where you need to ensure that any child with an intellectual or physical disability or mental illness is looked after.

Your assets can be protected from spendthrift children that have issues such as gambling problems or drug addictions. You can still provide for the child through a trust while ensuring their share is kept intact.

Testamentary trusts can also provide asset protection for “at risk” professionals or beneficiaries facing bankruptcy.

Case Study

Control of an estate can occur through the creation of a testamentary trust. Having a testamentary trust can assist with being able to control where and how your estate is distributed in the event of your death. In 2010, a man named Ken Talbot passed away leaving behind an estate that was estimated at over $1 billion. Legal action was taken by the grandfather of Talbot’s two youngest children against the executor of his will as he believed that his grandchildren were not provided for adequately.

Talbot’s will was written 8 years before he died, his will stated that he was to leave 30% of his estate to the Talbot Family Foundation for charity and 70% his wife and four children. He intended for his wife to receive 18% of the income and capital from the trust fund and the two youngest children were to receive 17% each, while his older children were to receive 24% each. This case shows the importance of giving careful consideration as to how your estate is distributed when you die, and you need to consider whether there is any risk of a potential claim being made. You should also think about the possible issues that could arise, such as who can make claims against your estate, whether you have left people out of your will and what assets make up your estate. In Queensland, only assets that are in your name will form part of your estate, which makes them disputable. You should also look into what you can do to reduce the risk of these types of issues arising, such as the use of a testamentary trust.

More information? To find out more, give us a call on 1300 023 782 or email team@cdrta.com.au.

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Craig is the principal consultant of C&D Restructure and Taxation Advisory and has been working in the industry since 1999. Having established C&D Commercial Partners in 2015 the precursor to the current business.

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Post Author: Craig Dangar

Craig is the principal consultant of C&D Restructure and Taxation Advisory and has been working in the industry since 1999. Having established C&D Commercial Partners in 2015 the precursor to the current business.

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