• How does a Testamentary Trust work?
• Can a Testamentary Trust save tax for my Beneficiaries?
• Can my family get access to the income and capital of my Estate?
• Can a Testamentary Trust provide asset protection?
• Can a Testamentary Trust protect minor children?
• How do I pass on control of my (lifetime) Family Trust?
• Can my Estate Plan deal with my superannuation?
• What is an Enduring Power of Attorney?
How does a Testamentary Trust work?
A Testamentary Trust is created by your Will and only takes effect on your death. The Trustee has discretion to distribute income and capital amongst your family Beneficiaries according to the directions in your Will.
A Testamentary Trust gives your family both flexibility and control over when and how they receive their inheritance. Depending on your Will, the Trustee may distribute the income or capital to Beneficiaries at various times and in differing proportions. The Testamentary Trust can be wound up at any time, or kept open for an extended period.
Because the Trust Assets are not legally owned by your Beneficiaries, but rather by the Trustee, they are protected in situations such as legal proceedings, bankruptcy or marital breakdown.
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Can a Testamentary Trust save tax for my Beneficiaries?
The tax laws provide favourable treatment for Beneficiaries of a Testamentary Trust who are under 18 years of age. In the case of a Family Trust (which operates during your lifetime) distributions to minor Beneficiaries are taxed at penalty rates. However in the case of a Testamentary Trust, minor Beneficiaries are taxed at normal rates.
Consider this example: Jane and Paul have two school age children. Jane will inherit $500,000. Jane works, and has a good income, so she pays tax on her income at the highest marginal rates. The expected income from this inheritance, calculated at 7.5% per annum will amount to $37,500. If Jane inherits in her own name then the tax on the additional income will amount to $16,125 leaving Jane with a disposable amount of $21,375.
On the other hand, if Jane inherits as Trustee of a Testamentary Trust in which she, Paul and their children are all Beneficiaries, she would be able to allocate the income to the two children who have no other income, and the income would then be taxed at the rate of $1,912.50 each ie a total tax of $3,825.00 leaving disposable income of $33,675.00. This is an improvement in the amount of available cash of $12,300. As it happens, that is almost the same amount as Jane and Paul pay in annual private school fees for each child, so the effect of the tax saving is almost the same as having a full annual scholarship for one child.
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Can my family get access to the income and capital of my Estate?
Your Trustee will have wide discretion to retain and preserve income and capital of the Trust or to distribute it to a range of family beneficiaries. Because of the flexible nature of the Trust, the Trustee will be able to stream income to Beneficiaries who are likely to be taxed at the lowest marginal rates, thus minimising the tax payable.
Income, and also capital can be made available to Beneficiaries for a variety of purposes including education, setting up a business, buying a residence or meeting day to day needs and expenses.
Flexibility is at the heart of the arrangement to ensure that the Trust income and capital is used for the maximum advantage of the Trust Beneficiaries but without allowing their inheritance to get into the hands of family Beneficiaries who may not be able to manage their own affairs such as young children and in some cases, Beneficiaries having special needs.
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Can a Testamentary Trust provide asset protection?
The kind of risks to which your assets, and therefore your family’s inheritance, are potentially exposed include, for example:
• family break-downs and divorce;
• the challenges of blended families;
• insolvency;
• professional negligence;
• drug and alcohol abuse and dependency;
• being sued by vicious creditors;
• the inability to manage one’s own affairs.
By bequeathing your assets into a Testamentary Trust structure, the legal ownership and control of these assets is separated from the people who are to enjoy the benefit of the inheritance – but without exposing them to these risks.
So your family achieves the best of both worlds. They have the ability to access the income and capital how and when needed but at the same time, their inheritance is protected by the structure set up in your Will.
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Can a Testamentary Trust protect minor children?
Yes. The following example explains how this works.
James and Erica have a combined Estate worth $1,600,000. They have two young school-going children. James and Erica wish to ensure that in the event of their deaths, their young children will be provided for, although the children are not yet ready to manage or control their inheritance.
James and Erica’s Wills each create a Testamentary Trust which will only take effect on death, to ensure that their children are well provided for during their educational years, with the value of their inheritance continuing to be preserved until they reach an age when they can manage their own affairs.
Their Will makes special reference to providing income for educational purposes, accommodation, maintenance, income and the like, giving the Trustee enough discretion to ensure that adequate income is made available for all these purposes.
When the children reach a pre-determined age, eg 25 (the age varies from one family to another), they may be given full or partial control of the Trust with the ability to either continue the Trust for tax and other purposes or to terminate it.
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How do I pass on control of my (lifetime) Family Trust?
Your will is a critical instrument in determining the future control of your Family Trust (established during your lifetime) which is likely to continue well beyond your death. The assets are held by the Trustee and not by you personally so they do not form part of your Estate, but you can have a say in the future control of the Trust by dealing with this in your Will.
Discretionary Family Trusts are commonly used for business purposes. The Trustee holds the assets on trust for family Beneficiaries.
The Trustee has the role of distributing income and capital of the Trust, and administering the Trust’s investments. The Trustee could be you personally or it could be a company in which you hold the shares. If the Trustee is a company then whoever takes over the shares will control the Trustee. You can bequeath the shares in your Will.
If you personally are the Trustee of the Family Trust then your Executor will usually become the Trustee in your place. If there are joint Trustees who are individuals, then the surviving Trustee will usually continue as Trustee of the Family Trust, and on the death of the last Trustee, then the Executor of the Estate of the last Trustee will usually become Trustee of the Family Trust.
If there is an Appointor in your Family Trust, then they usually have ultimate control of the Trust as they have the power to appoint and remove the Trustee. If you are the Appointor, you may have the power to appoint a new Appointor in your Will, to ensure that persons whom you can rely on can have future control of the Trust.
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Can my Estate Plan deal with my superannuation?
By using an Estate Plan you can usually reduce the likelihood that the recipients of your superannuation benefits will have to pay tax on those benefits.
The superannuation rules restrict who the benefits can be paid to following your death. You can usually arrange for your superannuation fund entitlements to be paid either directly to particular qualifying recipients or to your Estate.
If a lump sum death benefit is paid either directly or through your Estate to a death benefit dependent then this will be tax free. For that purpose, a death benefit dependent includes your spouse, children under 18, others who are financially dependent on you and anyone with whom you have an interdependency relationship.
It is important to ensure that your Will allocates the superannuation benefits only to your death benefit dependents if you want the benefit to be received tax free. Otherwise the recipient of the lump sum death benefit will be taxed on the "taxable component" – usually at a rate which is capped at 16.5% including the Medicare levy.
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What is an Enduring Power of Attorney?
A Power of Attorney is a document whereby you appoint another person to deal with financial and property matters on your behalf. The actual scope of the authority in the Power of Attorney can be very wide or narrow, depending on your requirements.
Your Will takes effect only on death whereas a Power of Attorney is intended for use during your lifetime.
An Enduring Power of Attorney is designed to operate even if you lose mental capacity, for example as a result of accident, illness or old age. In those circumstances an Enduring Power of Attorney can be a very useful document to ensure that the Grantee of the Power of Attorney is able to deal with your financial affairs on your behalf even though you are no longer able to do so.
It is therefore important to ensure that the person who you appoint under a Power of Attorney is someone who you know and trust to deal with your affairs.
