What are the benefits of a testamentary trust?
A trust that is created by a Will following the death of a Will owner is known as a testamentary trust.
They are created for the benefit of those people nominated by the Will to inherit the estate of the Will owner.
While the core benefits of a testamentary trust are the asset protection and tax minimisation opportunities they provide beneficiaries, not all testamentary trusts are created equal.
The terms of the trust must be included in the Will and should be sufficiently broad and detailed to give beneficiaries maximum flexibility to manage their own trust depending on their changing personal circumstances, financial needs and wishes.
In short, a testamentary trust should be individual (each beneficiary gets their own trust and don’t have to share with siblings which can lead to infighting), discretionary (each beneficiary controls their own trust) and optional (each beneficiary can decide if receiving their inheritance is right for them).
Let’s quickly examine the core benefits of receiving your inheritance in a testamentary trust that you control.
Income Tax Savings For Beneficiaries
Testamentary trusts give a beneficiary the option to reduce personal income tax by splitting income from the investment of the inheritance between a range of family members on low tax rates.
Capital Gains Tax Savings For Beneficiaries
Testamentary trusts also provide the opportunity for beneficiaries to minimise Capital Gains Tax which arises from the sale of assets. Capital Gains Tax is not triggered when an asset belonging to you passes via your Will to your executor or the trustee of a testamentary trust. Also, there is no Capital Gains Tax when your assets are transferred from the trustee of a testamentary trust to a beneficiary. As with the income of the trust, the trustee can select which of the beneficiaries of the testamentary trust should take the capital gain. By choosing to distribute the capital gain to a beneficiary on a low or nil income, the capital gains tax liability can be significantly reduced.
Inherited Assets Protected From Bankruptcy
Testamentary trusts provide protection to your beneficiaries from the repercussions of bankruptcy. Assets in a testamentary trust are not owned personally by the beneficiary and therefore do not form part of the beneficiary’s personal estate. A creditor or other person claiming against the beneficiary, therefore, cannot obtain the assets held in the trust.
Inherited Assets Protected From Family Law Claims
Testamentary trusts also provide protection for a beneficiary who is experiencing family law difficulties. With the inheritance held in a testamentary trust, the primary beneficiary can isolate inherited assets from personal assets. This substantially helps to protect their inheritance from family law property proceedings.
By relying on modern Wills that provide you and your loved ones with the option to receive inherited assets in an inexpensive and easy to manage ‘testamentary trust’, your beneficiaries are given the best chance to maximise and protect the inherited family wealth long-term. Best of all, testamentary trusts can be passed across generations.
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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.