Estate Planning strategy
Testamentary trust benefits in estate planning are extensive. They range from flexibility for the testator; to clarity of intent for the executor (and/ or the trustee).
Provision for the establishment of a Testamentary trust is made in a Will. The relevant provision of the Will, provides guidance for holding and dealing with specified assets in the estate following the testator’s death. A testamentary trust, settled by a deceased estate, is a discretionary trust. Many variations of Trust structures are available. You can structure a testamentary trust in your Will to suit your particular needs and requirements.
Testamentary Trust benefits
Tax
The much-heralded testamentary trust benefits for estate assets include the fact that –
- any income earned,
- capital gains arising, and
- franked dividends received,
from assets assigned to the trust are distributed to beneficiaries of the trust in the most tax-effective way.
Correctly drafted Testamentary Trusts can reduce the amount of tax payable by your beneficiaries on income earned from the estate. They have the capacity to obviate the penalty tax that children under the age of 18 pay on unearned income.
Income and capital gains derived by children under the age of 18 years from assets bequested under a Will are not subject to penalty tax rates. This same concession applies to income and capital gains distributed children from a Testamentary Trust. That Trust can be created –
- within the terms of a Will,
- on the death of the testator, or,
- in spite of a person having died intestate, in special circumstances,
and are not subject to penalty tax rates. Consequently, income and capital gains realised by the Trust will be subject to normal individual tax rates.
Significant tax advantages arising from Testamentary Trusts
Each child has a tax-free threshold of $18,200. Tax is payable at the schedules rate for individuals with a taxable income between $18,201 and $37,000. At time of original drafting of this article, the relevant rate was 19%. The standard rate Medicare levy will also be payable by the child if their taxable income is in excess of $20,542 (the threshold for 2012/13). This threshhold varies, as do current rates, from time to time. Updated information is available on the ATO website. Imputation credits attaching to franked dividends received through distribution from a deceased estate will reduce any tax impact on a child beneficiary.
The tax concessions do not apply solely to income and capital gains derived by the trust from inherited assets. The concessions also apply to any income and capital gains derived from assets acquired from the reinvestment of moneys received from the original inherited assets.
Testamentary Trust benefits include Asset Protection
Many clients are concerned about protecting their assets. One of the testamentary trust benefits delivering significant advantages for a testator – and their nominated beneficiaries (beyond the taxation considerations) – includes facilitating retention of assets within the family for the use and benefit of family members. Some particular benefits include protection from:
- beneficiaries becoming bankrupt. Especially useful for those involved in highly leveraged businesses.
- beneficiaries becoming divorced. This protects bequested assets from divorce settlements.
- spendthrift children.
- the risk of remarriage and the surviving spouse being able to pass on their assets to their children upon their death.
- handicapped and other ‘special needs’ dependants.
The protection afforded by a testamentary trust is provided by –
- the assets ownership held by one entity (the trustee – in whatever form), and
- that the benefit of the income and capital of the trust passes to other individuals as beneficiaries.
This separation of control and benefit allows testamentary trusts to protect assets from any legal action involving the beneficiaries and/or misuse of those assets.
More about testamentary trusts
The Will sets out the terms of the testamentary trust. These terms provide for the degree of control any of the beneficiaries have over the activities and investments of the trust. Having at least two trustees will increase protection of estate assets. The different trustees should be –
- an independent trustee, together with,
- the primary beneficiary (provided that beneficiary is not a minor) of the Trust.
Trustee companies and incorporated trustees are eligible for use in this role.
The testator client needs to decide whether –
- they prefer to sacrifice the independence of the beneficiary, and ensure that
- the inherited assets are protected and used sensibly for the benefit of the primary beneficiary of the estate trust,
and to take advice from an estate planning specialist as to how best manage that intention.
There is no legal limit to how many testamentary trusts a will can establish. A Will may provide for separate testamentary trusts for each beneficiary – particularly those with ‘special needs’ being isolated from others.
What to do now..
The experienced advisers at Continuum Financial Planners Pty Ltd have options available for you in dealing with Estate Planning matters and can prepare your brief to a specialist in the area aimed at optimising the value to you in undertaking your estate planning.
Our team works to the mantra that –
‘we listen, we understand; and we have solutions’
To make an appointment with one of our team –
- phone our office, on 07-34213456; or
- at your convenience, use the linked Make A Booking facility.
(This article was originally posted by us in August 2009. It has occasionally been refreshed/ updated, most recently in May 2025.)
