A vital part in planning your will is the creation of a family trust. It can entail terms and conditions to protect your assets that you will leave behind and guide your family in handling the financial consequences of inheriting your wealth.
The Australian Tax Office (ATO) defines testamentary trust as a trust that is created in keeping with an individual’s provisions in their will. To be exact, the trust doesn’t exist till the individual who wrote instructions in their will dies.
When this happens under the provisions of the will, the beneficiaries could be offered the alternative of gaining their inheritance within a testamentary trust, instead of coming into it directly.
By creating a testamentary trust, you make sure that a trust over your estate is set up on the day you die, meaning that your fortune will not be distributed directly to your beneficiaries but will be held on behalf of your beneficiaries through a trusted organisation or person.
Testamentary trusts have different kinds. In estate planning, however, a testamentary trust is discretionary, meaning the trustee can decide which beneficiaries named will receive capital or income from the trust fund.
Why provide for the creation of a trust in your will?
Not everyone can benefit from setting up a discretionary testamentary trust. However, for people to whom it is the right option, the benefits are:
- Tax effectiveness
- Protection of the bequeathed assets
As an example, a husband or a wife dies leaving behind two children and a spouse. A standard will provides that the spouse who died would leave their fortune to the surviving spouse. Normally, if both husband and wife die they will instruct that their wealth be distributed equally among their children.
In this case in which only one spouse dies, the estate’s assets would go to the surviving spouse.
The spouse still living would then be taxed on the income and capital gains made from those assets using his or her marginal tax rate. This means the amount of tax could increase considerably and any unearned earnings shared to the offspring below 18 years old would be covered by a penalty tax rate.
When there are children or grandchildren below 18, inheriting assets under a testamentary trust can provide more tax advantages. The reason is that Division 6AA of Part III of the Income Tax Assessment Act provides that a child below 18 years of age who get income from a trust created through a will would be covered by adult tax free threshold of $18,200, for 2012-2013 and 2014/2015, and marginal tax rates.
Protection of assets
What this means is the wish to make sure that the wealth is kept in the family for the gain of immediate loved ones.
Asset protection is also important in the event of a marital breakdown. People prefer that their wealth is inherited by their lineal descendants and not to worry about half of their fortune being given to a child’s former spouse.
Another motivating factor in creating a testamentary trust is the protection against a child’s bankruptcy, as the assets are held by a trust instead of turning into the direct asset of the child.
Another case where a testamentary trust may be useful is when there is a child with disability. It allows for the assets to be utilised for the benefit of the disabled child who may not be capable to managing financial matters after their parents die.
Things to consider when setting up a trust
Before setting up a testamentary trust, here are a few things to consider:
- Know the amount of asset it becomes beneficial to create a testamentary trust. Testamentary trusts basically bring the biggest advantage for massive estates with several children.
- Work out who you will name as the trust’s trustee – of which you are allowed to name more than one. One trustee can be an independent third party such as an accountant or a lawyer, and the other trustee is the trust’s main beneficiary.
There are people creating a will who may want to think about naming an independent trustee because they want to make sure that every beneficiary’s best interests are taken care of and the sharing of assets is not affected by factors like family politics. Doing this offers an additional level of safeguard over assets.
On the matter of considering the structure of the trust, it is best to consult an expert, such as an qualified accountant specialising in estate planning or an estate planning lawyer.
PJS Accountants offers a full range of services, including tax planning and compliance, accounting and SMSF services, and bookkeeping. For enquiries regarding our services, contact PJS Accountants.