Testamentary Trusts

You may also wish to discuss Testamentary Trusts when establishing your Wills and Powers of Attorney.

A testamentary trust is a trust established by someone’s Will. The testamentary trust comes into existence after probate of the Will of the deceased person is granted. In this respect the Will itself contains the terms that would otherwise be found in a trust deed.

Testamentary trusts normally give a wide discretion to the distribution of the capital and income of the trust for the benefit of the nominated beneficiaries. Testamentary trusts generally maintain all of the benefits of a discretionary trust but also have the advantage of offering a potentially greater level of asset protection and greater income tax benefits.

Testamentary trusts can be used for a variety of purposes but some of the more common usages include:

  • The income derived by the Trust can be allocated to more than one member of the family. This is of a significant taxation benefit.
  • Any income that is passed to minors through a Testamentary Trust is taxed as personal exertion income i.e. the first $18,200 is tax free and normal marginal tax rates apply. Please be aware there is restriction on how the income received by a child is spent. The income must be spent for the benefit or maintenance of the child e.g. school fees, clothing, percentage of family holidays etc.
  • Any income derived by the Trust is tax assessable in the hands of the beneficiaries.
  • A testamentary trust cannot be established after the person has died and will only come into effect on the date of death.
  • Can provide protection of assets (as they are owned by the trust) from creditors in the case of bankruptcy and family law issues generally.
  • You should be very specific about the beneficiaries as these can not be changed after date of death.
  • Determine the Trustee and the primary beneficiary. The Trustee is the owner, the primary beneficiary is the decision maker. They can be one person, but the tax effectiveness of the Testamentary Trust could be jeopardised as the Tax Office may regard some such cases as simply a device for minimising tax.

These are only some of the areas that must be addressed when thinking about Testamentary Trusts. Consideration should be given to the Will itself, to ensure that it is up to date and there is a provision for Enduring Power of Attorney.