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Here is what you need to know about incorporating a testamentary trust into your Will

Why should you incorporate a testamentary trust into your Will?

Often parents and grandparents engage in estate planning to pass on assets and resources to their children once they turn 18 years of age. It is an effective way to create peace of mind and ensure their little ones are met with financial stability upon reaching adulthood. Having a Will drafted is a great way to express how you would like your assets to be distributed, but in the right circumstances, the security of a basic Will can be significantly enhanced by the implementation of a testamentary trust.

So, what is A Testamentary Trust?

A trust involves an individual or entity (‘the trustee’) holding property for the benefit of another individual (‘the beneficiary’). There is a range of different types of trusts. However, a testamentary trust is created in an individual’s Will and takes effect after their death.

Discretionary Testamentary Trusts, in particular, have become increasingly common in estate planning, offering heightened control and security over your assets to that of a basic will.

Greater protection against legal proceedings and third-party claims. Discretionary Testamentary Trusts protect assets in cases of family conflicts, where divorce proceedings involving property and financial settlements have been commenced. Holding a beneficiary’s inheritance in trust makes the assets separately identifiable as a financial resource of the parties and prevents them from being drawn into the asset pool and divided accordingly. This is particularly the case if the beneficiary does not yet have control over the assets. For example, if a beneficiary has no substantial influence over the general administration and distribution of the testamentary trust, then their interest in the trust will likely be excluded as a property/financial resource. The Court will generally look at historical distributions under the trust and whether the beneficiary is, or has influence over, the appointer or trustee of the trust. If found to be no, or very minimal, control by the beneficiary, assets under a testamentary trust will either be excluded from proceedings or included at a lower value.

Further, assets that are directly passed on to a beneficiary are exposed to claims of ownership by third parties, including disgruntled ex-spouses and creditors. Particularly advantageous in circumstances of bankruptcy, assets distributed via a testamentary trust are significantly less vulnerable to such claims because the assets are owned by the trust and not the beneficiary themselves. As such, any action taken by creditors against a beneficiary of a testamentary trust will be unsuccessful in accessing a distribution under the trust.

Taxation benefits

Also highly advantageous from a taxation point of view, tax benefits can be optimised through the division of income to multiple beneficiaries under a testamentary trust. Most commonly, testamentary trusts involve parents and grandparents electing minors as beneficiaries, leaving them a secure inheritance for later on in life. Beneficiaries under the age of 18 years old are subject to the income tax-free threshold of $18,200 per year, and any income above this is taxed marginally at adult rates. This is highly beneficial in comparison to other types of trusts, such as family trusts, where minors are taxed at the highest marginal rates on income exceeding $1,000.

Ensure your assets are protected and distributed according to your wishes:

A Will is a legally binding document with certain requirements and formalities that must be adhered to. If certain requirements are not complied with, then your loved ones may face extra legal costs, stress and time when trying to administer your estate after your death. It is, therefore best that your Will be drafted by a lawyer who can also provide legal advice in relation to estate planning and how to decrease the possibility of someone contesting your Will.

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Call: (08) 7325 0219


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