How does a testamentary trust work?
What is a testamentary trust?
A testamentary trust is a trust created by a Will on the death of a Will owner for the benefit of the beneficiary. Inherited assets held in a testamentary trust are considered privileged and substantially protected from third parties, such as following a divorce, de facto break-up or following financial problems like bankruptcy.
Testamentary trusts also provide beneficiaries with opportunities to minimise the income tax and capital gains tax burden on inherited assets.
These asset protection and tax minimisation advantages are why relying on a Will that provides testamentary trusts is so recommended by Australian lawyers.
How does a testamentary trust work?
Like all trusts, a testamentary trust can be thought of as an imaginary bank that exists only on paper. The imaginary bank has certain rules that must be followed. These rules are spelled out in the terms of the trust that must be included in the Will of the Will owner.
A beneficiary names their testamentary trust (i.e. John Smith Holdings) and receives a tax file number for their trust. The annual accounting costs of a testamentary trust are minimal, usually only $300 - $500 for lodging a simple tax return.
Beneficiaries still manage and invest their inheritance as they normally would.
But under law, the inheritance is not owned in their own name. Instead, under law, it is 'held on trust' for the benefit of each beneficiary.
By holding their inheritance in a testamentary trust, beneficiaries can protect inheritances from third-party threats such as during a divorce or bankruptcy and can minimise the ongoing income tax and capital gains tax burden on inherited wealth.
Testamentary trusts are not all the same. The terms of a trust, which are the rules by which the trust is managed, vary from Will to Will.
In Wills from Will Wizard, we provide extremely detailed and broad terms (or rules) so that a beneficiary has complete flexibility with how they manage and invest their inheritance.
This flexibility is critical, as the future circumstances and tax status of beneficiaries remains unknown.
The testamentary trust acts as a separate financial entity, and so a tax return is required to be filed each year. This is usually handled by your accountant, with the cost associated with running a testamentary trust running from a few hundred dollars per year up to a few thousand depending on how complicated your needs and circumstances are, which dictates the work required by your accountant.
However these costs usually pale in comparison with the tax saved or with the value of protecting inheritances long term from common events like a business failure, bankruptcy or divorce.
Will Wizard ensures that beneficiaries can choose which inherited assets they wish to receive into their testamentary trust, whether they want to have multiple testamentary trusts, whether they want to alter the terms of their trust, or whether to have a trust at all.
Beneficiaries usually choose to be the trustee (i.e. the controller or manager) of their own trust.
All Wills from Will Wizard nominate a ‘controlling age’ that beneficiaries must obtain before they can act as trustee of their own trust.
Prior to reaching the controlling age, the executor acts as trustee on behalf of the young beneficiary.
Beneficiaries under the controlling age still have access to funds for health, education, living and welfare purposes, but are prevented from spending their inheritance on immature purchases such as an exotic sports car.
At Will Wizard we believe that every Will should provide beneficiaries with the option to receive their inheritance in a testamentary trust.
Will Wizard is the only online Will that provides testamentary trust provisions as standard, including broad trust terms for maximum flexibility in how a beneficiary can manage their trust depending on their changing needs and circumstances. No meetings are required, you simply complete our fun an easy online form that requires no financial details, and we then courier your secure Wills to your door for signature on delivery at no extra charge.
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As always, if you have questions about the suitability of any Will for your needs and circumstances, seek independent legal advice.