Testamentary Trusts

TESTAMENTARY TRUSTS

A Testamentary Trust can be a tax effective structure which can be used for the protection of assets held within the Trust. A Testamentary Trust can be established by your Will and commences or comes into effect after your death.

“A Trust” Is when a person (“Trustee”) owns or holds property or property rights, (“the Trust Property”) on trust for another or for a class of people (your child and the child’s descendents) “the beneficiary”. The Trustee is required to exercise all rights in or over the Trust Property for or on behalf of the Beneficiary and has no personal interest in or rights to the Trust Property. The Trustee must always exercise their powers in the best interests of the Beneficiary. The Trust Property may be held by the Trustee to achieve a particular objective ie. to pay for the education of grandchildren or for the accommodation of a class of persons.

“Discretionary” Trust the Trust Property is held by the Trustee on trust for Beneficiaries usually with wide discretionary powers to decide who is to receive the income and the capital from a wide class of people.

There will be a provision if the Trustee does not elect to pay the income to one or more of the class of Beneficiaries between whom the Trustee has discretion to give the income, for it to go to a nominated Beneficiary or class of Beneficiaries ie. the children of the person setting up the trust. Discretionary Trusts must be established with care as the Trustee has a wide power to distribute the income and capital so it is best that the class of persons who can receive the income are limited to those it is intended to benefit and the expectations of children cannot be defeated by other family members.

The Trustee can determine how the trust is managed and the income distributed provided it is legal and permitted by the terms on which the trust is established.

“Testamentary” Trust Is a trust established by a Will.

Advantages / Features

A Testamentary Trust can give the Trustee flexibility in distributing income and capital to a wide class of beneficiaries nominated on the establishment of the trust.
They are best limited to a group of descendants the testator wishes to benefit from their will ie. a child and the child’s descendants.
Testamentary Trusts offer primary beneficiaries the advantage of flexibility to utilise the tax status of general beneficiaries who have a low margin income tax rate and capital losses, i.e., income can be allocated to children but having the benefit of adult tax free thresholds and marginal rates.
Minors are able to receive $18,200 of income from the Trust per year, tax free. Unlike family Trusts where income paid to minor’s attract tax payable on the income at the highest marginal rate.
It offers flexibility in distributing income and assets to beneficiaries, taking into account taxation.
Assets are not available to creditors and allows the assets of a bankrupt beneficiary to be protected, or beneficiaries in high risk occupations.
It may also be effective for family law purposes. The Family Court must take into account the terms of the trust and how it has been operating.
Provides protection of assets for the beneficiaries, of the trust, who are spendthrift or have disabilities.

The Trustee, the person appointed as the “controller” of the Trust, controls the assets of the Testamentary Trust. This allows the Trustee to distribute as much or as little as they determine to any or all of the beneficiaries. It is for this reason that we recommend you prepare a “Letter of Wishes” addressed to your Trustee detailing how you wish your assets to be distributed. Alternately it may be desirable to insert a set of objects in the trust terms however this has to be done with care as it may place limits on the Trustee’s powers which may defeat the very flexibility that the testator may want. It is important that you choose carefully when deciding who will be the Trustee of the Trust.

When a person dies, Application for a Grant of Probate is made to the Supreme Court i.e. the Will is proved to be valid. Open Probate being granted of a Will containing testamentary, a Trust or Trusts that will be ongoing, the executor has to obtain a Trust Tax File Number. There will be one Tax File Number for each testamentary Trust.

For Testamentary Trusts, annual accounts and a tax return will have to be completed annually.

Contact Formbys Lawyers today to make an appointment to discuss your Succession Planning requirements 08 9354 0300.