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Is a Testamentary Trust for you?

Written by Gabriella Ferraro


Asset protection strategies are important to consider in estate planning. This article will focus on whether a Testamentary Trust can be beneficial to you and how such a trust could assist you in meeting your estate planning objectives.


Our principal solicitor Sam Ferraro previously wrote an article which focused on explaining a Testamentary Trust. You can read more on this here:


https://www.ferraro.com.au/post/testamentary-trust-wills


In essence, a testamentary trust is a trust created by a valid Will. It is a common element of a modern estate plan for individuals.


PLANNING BEGINS


First and foremost, you should put together a list of assets which actually form part of your estate. A solicitor will be able to assist you with this. For example, most couples own their home together and both names appear on the Certificate of Title. However, the question is – are the parties registered on title as joint proprietors or tenants in common? If the home is owned by two people as joint proprietors, this asset does NOT form part of your estate after your passing and this means the asset cannot be protected by a Trust included in your Will.


How can a TT help me and my beneficiaries?


The discretionary trust structure enables income that is earned by the trust to be distributed to the beneficiaries of the trust in such proportions as the trustee decides. This provides many benefits and a Testamentary Trust can be useful in the following circumstances –


1. To ensure concessional tax treatment is available to distributions of capital and income to infant beneficiaries – as income derived by infant children via a TT is assessed at the normal, individual adult rates (over $20,000 tax free and the balance taxed at marginal rates) which for most families will mean significant tax planning opportunities.


2. To help protect inheritances from trustees in bankruptcy – this is particularly helpful where potential beneficiaries are company directors, business owners or professionals as a TT can protect assets from creditors.


3. To protect accumulated wealth from wastrel or spendthrift beneficiaries – the trust structure allows the trustee to provide disproportionately for particular beneficiaries, such as those who have drug dependencies or gambling issues.


4. To provide for infant children and disabled beneficiaries.


Disadvantages of having a TT


1. Similar to other forms of trust, a TT requires appropriate levels of administration and often professional assistance which means the structure can be costly to create and maintain.


2. Laws around TT are changing, particularly in relation to the current tax benefits and concessions. This means that there may be changes to the law in future which may make some expected advantages otherwise not available.


FREQUENTLY ASKED QUESTIONS


What if a beneficiary goes through a separation or divorce after my passing - will a Testamentary Trust ensure their spouse does not receive any inheritance?


There has been one recent case which states that a Testamentary Trust will be ignored as an asset for family law purposes. However, this area is not set in stone and for the most part, the Family Court is reluctant to ignore the benefits received by a party through a Testamentary Trust and will include such a Trust in the assets of a party.


In short, a Testamentary Trust may not provide protection to a beneficiary involved in a family law proceeding as no trust is bulletproof against the powers of the Family Court.


If I create a Testamentary Trust, will it stop people from making a claim against my estate?


A Testamentary Trust alone is unlikely to assist in protecting assets against a Part IV claim by an eligible person. Assets set aside for a testamentary trust can be made available, particularly if the Courts feel that the deceased used the trust in an effort to escape their moral duty to provide for the eligible person.


This information provided in this article is general advice only. Should you have any queries, please do not hesitate to contact our office.


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