Various studies conducted by the Public Trustee in WA and NSW show that up to 45% of Australians do not have a will. Of those that do have a will, many are outdated and not sufficiently flexible to suit the more frequently complex nature of many will maker’s families and financial circumstances.
Wills can be generally to drafted to suit a wide range of aims the will maker may have, whilst also being structured with the testator’s personal and financial circumstances in mind.
What is a Simple Will?
Whilst undoubtedly the predominant type of will is a simple will, this structure generally has little to no asset protection built into its terms and tends not to distribute the estate in a very tax advantageous way.
If your spouse or one of your children goes through a subsequent relationship breakdown or enters into bankruptcy proceedings, for example as a result of a failed business venture, whatever they have inherited from your estate may be at risk of being subject to a Family Court order or open to dissipation by a Trustee in Bankruptcy.
What is a Testamentary Trust?
Whilst it is never possible to account for every possible contingency and thereby “rule from the grave”, if protecting assets and attempting to retain them in the family is of major importance to a client, a testamentary trust can be of great benefit. This is particularly the case where the estate is valued at more than $500,000, holds diversified assets, such as investment properties, or the will maker has descendants who are minors (under 18).
A testamentary trust is a trust that is created by a will and only comes into existence on the death of the will maker. It can run for varying lengths of time, provided it does not run over the 80 year rule against perpetuity
Benefits of a Testamentary Trust
Typically the two major benefits of a testamentary trust, that other types of wills do not generally include, are asset protection and taxation benefits.
Testamentary trusts can be mandatory or optional, generally at the election of a “Primary Beneficiary” – the beneficiary that you want to primarily benefit under your estate such as your spouse or child – and can hold all or part of your estate.
Provided the Primary Beneficiary has reached “preservation age” – being the age you decide they have sufficient financial responsibility to control the assets – and is not “automatically disentitled”, for example by being embroiled in a relationship breakdown or being declared bankrupt, the will can advance them your beneficiary the option to use the testamentary trust from which their gift of your estate will be transferred, or instead to avoid the trust altogether and take their gift absolutely.
A testamentary trust can of course be made mandatory if additional asset protection is required.
Important positions within the trust include the trustees, as this party will have the discretion to determine if and to whom distributions will be made. To improve asset protection, an independent party or someone the will maker particularly trusts may be appointed to act as the trustees until such time as the Primary Beneficiary has reached preservation age (and is not disentitled). After this time, unless the Primary Beneficiary triggers a risk event such as those I’ve referred to, they effectively control the trust.
In the event of a risk event, such as relationship breakdown or bankruptcy, a Primary Beneficiary becomes automatically disentitled to hold important offices within the trust, thereby aiming to protect the assets of the testamentary trust from the reach of various creditors or from the actions of the Primary Beneficiary themselves.
The other benefit of a testamentary trust, as opposed to bequeathing assets absolutely, is taxation minimisation. Transferring the assets to a testamentary trust can allow income or capital generated by the trust to be distributed amongst beneficiaries in the most tax effective way, for example to non-income earning spouses or children. Children in particular receive significant taxation benefits under a testamentary trust, as currently they are entitled to the full adult tax free threshold and marginal tax rates thereafter. In the 2015 financial year, a child could therefore receive $18,200 tax free from a testamentary trust.
If you have multiple children or grandchildren, it is easy to see the significant taxation benefits that can be obtained through the use of a testamentary trust as opposed to bequeathing assets absolutely to a spouse or child under a simple will.
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