A testamentary trust is a trust created by a will. It is generally a discretionary trust – one where the Trustee has full discretion about who benefits, and to what extent, under the trust. A testamentary trust has two significant advantages for a will maker and the nominated beneficiaries:
- Significant taxation advantages in terms of income splitting and,
- Protection of the bequeathed assets from any financial or other difficulties that the beneficiaries may suffer.
In planning your estate these factors can have a significant impact. It can ensure that capital and income is distributed, not only in the most tax-effective manner, but also how you intended. It is very useful for complex families and de facto relationships.
The tax concessions do not apply solely to income and capital gains derived by the trust from inherited assets. They also apply to any income and capital gains derived from assets acquired from the reinvestment of moneys received from the original inherited assets. There is no legal limit to how many testamentary trusts a will can establish. Ideally, a will would establish a separate testamentary trust for each beneficiary.
Asset protection – many clients are concerned about protecting their assets. They want to make sure that the assets remain within the family and are used to benefit family members. In particular, clients are concerned about:
- their beneficiaries becoming bankrupt, especially those that are involved in highly leveraged businesses;
- their beneficiaries becoming divorced and their assets being split in the divorce;
- spendthrift children;
- ensuring that the surviving spouse will pass on their assets to their children upon that person’s death; or
- looking after disabled children.
The significant advantage of a testamentary trust is that the assets are owned by one person(s), the trustee, and the benefit of the income and capital of the trust passes to another person, the beneficiaries. This separation of control and benefit allows testamentary trusts to protect assets from any legal action involving the beneficiaries or misuse of those assets.