A testamentary trust is established when a testator leaves assets to their spouse and/or their children (or other beneficiaries) by way of a trust in their Will, rather than to the beneficiaries in their personal capacities. A Will can establish any number of testamentary trusts.
The testamentary trustee will hold the assets (income and capital) for the benefit of the beneficiaries and the testamentary trust will be administered in accordance with the terms specified in the Will and will operate in much the same way as a normal discretionary trust.
The primary beneficiary (for example, the spouse or a named child, if an adult) will often be the trustee of the testamentary trust, however, the Will can also specify another trustee for a testamentary trust (any person or, less often, a company). An interim trustee is often appointed as trustee of a testamentary trust created for a child until the child attains a specified age (eg 25 years) at which age the child then takes the role of trustee (or otherwise appoints another as trustee in his/her stead). For convenience, the executor is often appointed as interim trustee but any person (or company) may be appointed.
Advantages of a testamentary trust
A testamentary trust enjoys certain advantages that may be more beneficial than if a beneficiary were to receive their benefit directly. The major benefits of a testamentary trust in a Will include:
#1 The trustee may distribute income at their discretion in order to effectively reduce the overall tax rate;
#2 The trustee may distribute capital to beneficiaries of their choosing (provided the beneficiary is named, or falls within a category described, as a beneficiary in the Will) and may wind up the trust when thought desirable;
#3 Children under 18 enjoy the adult tax‑free threshold;
#4 Distributions can be used to pay for maintenance, upkeep and education of children;
#5 As the tax law now stands, the passing of the testator’s assets into the trust or trusts set up under the Will are exempt from transfer duty and are not a disposal for capital gains tax purposes;
#6 A testamentary trust may provide protection in family law property settlements;
#7 The trust gives asset protection from creditors; and
#8 If the trustee is a beneficiary of the testamentary trust there may be no trustee administration costs charged to the testamentary trust.
There will not always be a benefit in using a testamentary trust. Often, the assets involved will not be sufficiently large for there to be any tax benefit (from income earned by those assets). Sometimes there will be little risk of a beneficiary losing assets so asset protection may not be necessary. The extra complexity is only justified if the benefits listed above are real.
If you would like to find out more about testamentary trusts, please contact Brett, Steve or James on 3007 2007 or bcribb@stratusfinancialgroup.com.au, snicholas@stratusfinancialgroup.com.au or jmarshall@stratusfinancialgroup.com.au
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Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. This is general advice only and does not take into account your objectives, financial situation or needs, so you should consider whether the advice is relevant to your personal circumstances. You should also read the relevant Product Disclosure Statements (PDS) before making any financial decisions.