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Testamentary trusts: the benefits and considerations

By June 14, 2019 No Comments

Benefits of using a testamentary trust

Testamentary trusts are established under a valid will to provide a greater level of control over the distribution of assets to beneficiaries.

Not only do testamentary trusts provide tax advantages, they can also be an effective estate planning tool when it comes to the protection of your assets. The manner in which assets are distributed to trust’s beneficiaries will depend on the type of testamentary trust. The two most common types are:

  • Discretionary testamentary trusts, which the ATO advises can be used in some cases for tax outcomes and asset protection. It is a separate trust of the deceased estate, and the trustee has the discretion to distribute capital or income between the beneficiaries that are nominated in the will.
  • Protective testamentary trusts, this is when the beneficiary takes their inheritance through the trust and does not have the option to appoint or remove trustees. It is generally established for the benefit of someone who is otherwise unable to manage their own affairs.

Tax advantages:

One reason that you may choose to use a testamentary trust is for its ability to achieve tax outcomes. Income, capital gains and franked dividends can be distributed by trustees among beneficiaries each year in a way that is tax effective. For example, the trustee of a discretionary testamentary trust may choose to pay certain amounts to various beneficiaries with differing incomes, which could minimise the tax paid on the total sum.

Distributions from a testamentary trust to minors is usually taxed at adult marginal rates rather than penalty minor rates. This allows eligible minor beneficiaries to receive the full tax-free threshold concessions of $18,200 on income received through a trust.

Asset protection:

Testamentary trusts can protect your assets when they get passed on to beneficiaries. A common objective by those who administer testamentary trusts is to ensure that each beneficiary’s inheritance is protected from recovery by creditors. For example, inheritances or superannuation death benefits that are paid directly to beneficiaries can be susceptible to recovery or seizure by any creditors that person may have. However, placing the death benefit or other assets into a testamentary trust will protect your dependants against recovery as creditors can’t claim assets or income held in trust.

Before setting up a testamentary trust, there are a number of things that should also be taken into consideration, such as tax implications for the exemption of capital gains tax on your residence if it is held in the trust, or potential fees involved in the cost of administering a trust.

Contact us to see how this will affect you, and to receive advice on the benefits of testamentary trusts in your estate planning.

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