Nathan Scott – Director, Commercial and Succession Planning
Among the various estate planning strategies that we offer to our clients, testamentary trust wills are an increasingly popular option and are particularly relevant given the vast amount of wealth set to transfer from generation to generation in the next few decades.
Let’s delve into what testamentary trust wills are, how they work, and the advantages they offer in estate planning.
What is a Testamentary Trust Will?
Unlike a regular will which gifts your assets to your beneficiaries outright, a testamentary trust will allows your beneficiaries to take their inheritance via a discretionary trust structure, which can assist them with tax planning and managing and protecting their inheritance. We usually recommend that a client consider a testamentary trust will if their beneficiaries are likely to receive a substantial inheritance.
How Does a Testamentary Trust Will Work?
The terms of the testamentary trust are contained in the will itself and upon your death, the testamentary trust is established. A trustee is appointed to manage the trust according to the terms set out in the will. The terms of the trust allow the trustee to distribute the capital and income of the trust to a wide class of beneficiaries, who are generally the principal beneficiary named in the will and family members or related entities of the principal beneficiary.
Depending on the circumstances, the testamentary trust can be structured so that it is controlled by the beneficiary, or, if there are concerns about a beneficiary’s ability to manage their inheritance, a third party can be appointed to manage the testamentary trust for the beneficiary.
You can also specify conditions or timelines for distributions, which can be particularly useful for beneficiaries who may not yet have the ability to manage a large inheritance responsibly.
Key Advantages of Testamentary Trust Wills
Asset Protection: Testamentary trusts allow your beneficiaries to protect their inheritance against potential creditors and legal claims, as the assets are held in the trust and not owned by the beneficiary in their personal capacity. This is great for beneficiaries who own a business, who are a director of a company or who work in a high-risk profession, which each carry significant financial and legal risks.
Tax Planning: Testamentary trusts provide a significant tax advantage by allowing the trustee to allocate or split income among the trust’s beneficiaries in a way that minimises the overall tax liability.
The trustee has the flexibility to determine which beneficiaries receive the trust income. This income is then reported by the beneficiaries on their personal tax returns and taxed according to their individual marginal tax rates.
By directing income to beneficiaries with lower marginal tax rates, the trustee can effectively reduce the total tax burden on the trust’s income. With the current tax-free threshold set at $18,200, beneficiaries of the testamentary trust can potentially receive up to $18,200 in tax-free income each year.
At Beck Legal, our experienced estate planning lawyers are here to help you navigate the complexities of testamentary trust wills and create a plan that reflects your wishes and provides peace of mind for you and your family. Contact us today to discuss how a testamentary trust will can be integrated into your estate planning strategy to ensure your assets are protected and well-managed.