The significance of choosing the appropriate structure to make the protection and maintenance of your assets possible cannot be overstated. This is necessary regardless of whether you have acquired your fortune on your own or through inheritance.
In this instance, you may want to consider estate and succession planning to protect your assets and ensure some tax benefits for the beneficiaries of your estate.
One of the most effective estate planning strategies today is the use of a testamentary trust in a will.
When your estate is distributed to your beneficiaries, a testamentary trust can help with minimising capital gains tax, stamp duty, and other taxes that may be due. It can also help protect your assets from creditors, unscrupulous individuals, and the like.
Testamentary trusts—the basics
A testamentary trust (aka will trust) is, in simple terms, a trust that’s created according to the terms set in a will. It typically takes the form of a discretionary trust.
However, unlike inter vivos (facilitated or done between living persons) discretionary trusts, which allow for the transfer of assets and gifts while the grantor is still alive, testamentary trusts are only activated after the grantor’s demise.
Each beneficiary under your will may have a testamentary trust that is most appropriate to their circumstances. There are different sorts of testamentary trusts that can be established, such as:
- Beneficiary-controlled testamentary trust
- Capital-reserved testamentary trust
- Protective testamentary trust
Benefits of testamentary trusts
Compared to typical wills, a testamentary trust offers the grantor more discretion over estate planning and distribution to beneficiaries.
Among the key benefits of testamentary trusts are:
- Flexibility: A testamentary trust functions in a similar way to a discretionary family trust. A trustee may choose which beneficiaries get trust income as long as they are nominated in the trust. With this freedom, the trustee can choose to distribute income, capital and dividends in the most tax-efficient way. Also, in the event that superannuation funds are paid to the estate, trustees will have plenty of discretion in how to handle them.
- Asset protection from third parties: Testamentary trusts can shield assets from possible court cases, bankruptcies, and legal actions because the trustee has the title to the trust assets (not the beneficiaries directly). A testamentary trust can offer you extra asset protection if your surviving spouse or your adult child runs a business that carries a large financial risk. For adult children, it might offer family law protection as well.
- Tax advantages: Testamentary trusts give trustees the option to divide and distribute the trust’s income for tax planning purposes. Also, distributions from a testamentary trust will be tax-free up to the standard full exemption amount. Beneficiaries who have children aged below 18 can significantly profit from this tax planning benefit because they can use pre-tax income to pay for their children’s expenses. Moreover, any capital gain made by the executor (the person chosen to carry out the will) is disregarded by law when a capital gains tax asset is transferred from the executor to a beneficiary.
So, is a testamentary trust for you?
When it comes to estate and succession planning, it’s always better to get the input of your financial advisor and a solicitor specialising in wills and trusts.
If this article has inspired you to think about your own unique situation and, more importantly, what you and your family are going through right now, please contact your advice professional.