Testamentary Trusts

Testamentary trusts are simply discretionary trusts created in a will. They do not take effect until the testator dies. Over the recent years they have become a very popular tool in testamentary planning because they have many advantages and few disadvantages.

The advantages include:

1. By bequeathing funds to a testamentary trust rather than to an individual the testator gives the primary individual he or she wishes to benefit the opportunity to retain the testamentary trust and utilise it for income splitting. Income splitting is not available to children under the age of 18 years in relation to a standard discretionary trust however there is an exception pursuant to the Income Tax Assessment Act 1936 (“ITAA”) in accordance with Section 102AG in relation to a discretionary trust created under a will. With a standard discretionary trust income splitting attracts the maximum rate of taxation for any distributions above the usual tax free threshold of around $5,000.

   That is not the case with income splitting under a testamentary trust with the result that the children or grandchildren who are not earning an income at the minimum taxation threshold can receive distributions from a testamentary trust which will only attract a marginal rate of taxation which will be zero for the first $30,000 or so and then the rate increases according to the income derived.

   It is easy to see that particularly when there is more than one child involved this can involve tens of thousands of dollars in tax savings for the period during which the children are not earning income for a beneficiary who would otherwise be taxed at the maximum rate.

2. We have seen testamentary trusts utilised to benefit children or other beneficiaries who the testator wishes to benefit. A primary beneficiary however has concerns about the terms of that beneficiary’s ability to properly manage the bequest. This might be because the testator has a view that the beneficiary has a gambling or drug problem or is otherwise shown that he or she is incapable of adequately looking after their finances due to spending habits etc.

   Testamentary trusts are a way to look after such beneficiaries by ensuring they will always have income and capital available to them. These beneficiaries never get control of the bequest however they are not in charge of their finances so they cannot access the capital and waste it.

3. We have seen testamentary trusts used extensively where a testator wishes to protect his or her bloodline and exclude children’s spouses for whatever reason. There are many reasons why a they may wish to do this however one reason which comes up regularly is a testator’s desire to protect his or her child’s inheritance in the event of a divorce and so the testator will create a testamentary trust not in favour of the child but for the benefit of the child and her children leaving out the child’s spouse.
4. There can be benefits in relation to pensions by creating a testamentary trust whereby assets are not regarded as being held by the pensioner even though they remain potential beneficiaries under a testamentary trust. This is important with means tested trusts.

A principal advantage of testamentary trusts are that it leaves the ultimate benefit in a flexible state to be determined by trustees of the testamentary trust who will control the trust. Those trustees can be the principal beneficiary that the testator wishes to benefit or the testator can appoint other trustees. On this and other related subjects advice should be sought on issues pertaining to testamentary trusts particularly when an estate is of a sufficient size and there are numerous potential beneficiaries of such a trust.

The partners are very experienced in this area of the law and are more than willing to answer all your questions and provide any assistance possible.