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Testamentary Trusts

What is a Testamentary Trust?

Testamentary Trusts operate similarly to Discretionary Family Trusts. However, while Family Trusts are created and activated during a person’s lifetime, a Testamentary Trust is created under a person’s Will and is only activated after that person dies. The nominated Executor and/or Trustee in the Will controls the trust assets for the benefit of the beneficiaries.

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How do Testamentary Trusts work?

Your Will usually contains a separate Discretionary Trust for each of your beneficiaries. For example, each child beneficiary under the Will has a trust set up in his or her own name in which their proportioned benefit (being cash or property) is distributed. Separate trusts for each beneficiary assist to avoid potential tax traps involving family trust elections.

The Trustee of each trust has the discretion to decide which beneficiaries are to receive distributions of income and/or capital from that trust. They will apply for a separate tax file number, operate bank accounts, keep separate trust records and lodge separate tax returns for each beneficiary.

When does a Testamentary Trust start?

A Testamentary Trust starts after the death of the Will-maker, once the estate administration has been completed.

When does a Testamentary Trust end?

A Testamentary Trust will last a maximum of 80 years.

What assets are distributed into a Testamentary Trust?

Only sole assets owned by the Will-maker can pass into a Testamentary Trust.

Assets held jointly or in other entities (such as existing Family Trusts and companies) do not pass into the Testamentary Trust.

Please note also that superannuation and life insurance proceeds do not automatically form part of a person’s estate.

What are the advantages of a Testamentary Trust?

Tax Flexibility

  • Income Splitting: Total tax payable by a beneficiary on income earned by the Trust can be reduced
  • Income to Minors: Income can be distributed to minors at normal adult marginal tax rates tax-free subject to any income received from other sources. Family Trust distributions to minors are extremely limited (plus any low-income rebate) before being taxed at the top marginal rate.
  • Stamp Duty: No stamp duty is payable on the creation of the Trust, and property under the Will transferred into the Trust is exempt from stamp duty.
  • Capital Gains Tax: Capital gains tax (CGT) may be effectively deferred. It is not until the Trust disposes of an asset that it attracts CGT. Capital gains can be distributed between beneficiaries in a tax-effective manner.
  • Land Tax: Trustees can access land tax concessions.

Asset Protection

Beneficiaries don’t actually own any of the assets in a Testamentary Trust. They only become entitled to any Trust capital and/or income after the Trustee decides to make a distribution to them.

Because the Trustee holds the legal title to the Trust assets, these assets are generally immune from attack by spouses, creditors and other beneficiaries.

The Trust can also protect assets from:

  • professionals who may be exposed to negligence lawsuits;
  • business owners who may be exposed to creditors;
  • minors or those with impaired mental capacity;
  • gamblers, alcoholics, spendthrifts, etc;
  • bankrupts; and
  • those involved in a marital breakdown.

Notably, the Trust can also restrict access to capital and/or income until a beneficiary reaches a certain age.

If you feel your estate would benefit from a Testamentary Trust, call us to arrange an appointment with one of our experienced estate planning lawyers.

Contact David Davis Lawyers

Phone: 03 9014 1299
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