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16 February 2012 Why do I need a Will with Testamentary Trusts?

By Phillip Briffa, Solicitor and Angela Harvey, Partner


Advantages in nut shell

Having a testamentary trust in your will:

  • Can have asset protection benefits for your beneficiaries, for instance, by protecting from loss caused by bankruptcy and in some cases, divorce.
  • Provides capital gains and income tax efficiencies.
  • Is prudent where a beneficiary to your will is either incapable of managing their own affairs or vulnerable to exploitation.

A testamentary trust is a trust that is established under a will. There are three major benefits which flow from utilising a testamentary trust in your will:

  1. Ability to split income;
  2. Asset protection benefits; and
  3. Other protective benefits.

1.  Ability to split income

If a beneficiary receives their inheritance in their personal name, they are taxed on any income and capital gains acquired from the investment of their inheritance at their personal marginal tax rate.

One major advantage of a testamentary trust is that income distributed to a beneciary under 18 years of age is taxed at adult rates, rather than the penalty rates that apply should income be received by a child from a normal discretionary trust set up during your lifetime (45% for every dollar over $3,000).

By using a discretionary testamentary trust, any income gains, capital gains and franked dividends earned from your estate assets after you die, can be distributed among family beneficiaries each year in the most tax-efficient way.

2.  Asset protection benefits

Assets held on trust are afforded a general level of protection from loss simply by virtue of being trust assets.  By having your will set up with testamentary trusts your beneficiaries benefit from this added level of protection.

For instance asset protection benefits include possible protection to your beneficiaries' inheritance should your beneficiary one day come under attack from creditors, for example in a bankruptcy situation.

3.  Other Protective benefits

Other protective benefits flow from having a testamentary trust in your will.  These benefits apply in particular to beneficiaries who are either incapable of managing their own affairs (due to spendthrift tendencies, addictions, age or disability) or are vulnerable to exploitation.

Such benefits are gained via the mechanics of how a testamentary trust, upon your passing, is set up and managed. For instance, by having a testamentary trust the assets of your estate are held and managed by a trustee (as appointed by you) for the benefit of your beneficiary.

By separating the aspects of control and benefit in this way an incapable or vulnerable beneficiary can be adequately protected.

Angela Harvey, Partner  |  Phone: +61 2 9233 5544  |  Email: axh@swaab.com.au

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This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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