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Australian Testamentary Trusts

Testamentary trusts are widely recommended by professional advisors, but many Australians don't know what they are or what they do.

Here's what you need to know.

Testamentary trusts are widely recommended by lawyers, but most Australians don't know what they are or what they do.

What is a testamentary trust?

A testamentary trust is a special type of trust that can only be established by a comprehensive Will that includes the required testamentary trust legal provisions and trust terms.

Also, testamentary trusts can only be established for beneficiaries after the Will owner dies.

A simple way to think about a testamentary trust is as an 'imaginary bank' or legal entity that exists on paper to help beneficiaries manage and protect their inherited assets during common events like divorce and bankruptcy, while also providing valuable opportunities to minimise the ongoing income and capital gains tax burden placed on inherited wealth.

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In short, testamentary trusts are the best way Australians can help beneficiaries maximise and protect inheritances long-term.

In every Will from Will Wizard, there is an entire 12-page segment dedicated to helping executors establish protective, multi-generation, testamentary trusts for beneficiaries.

 

How do testamentary trusts work?

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Testamentary trusts are written into your comprehensive testamentary trust Will, waiting to be established by your executor for your beneficiaries after your death.

To provide testamentary trusts to your beneficiaries, all you have to do is purchase and sign a comprehensive testamentary trust Will.

After you die, your executor uses your testamentary trust Will to establish testamentary trusts for your beneficiaries, with your Will becoming your beneficiary’s testamentary trust document.  

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.

IMPORTANT:

If your Wills do not include the testamentary trust provisions & terms, your beneficiaries cannot use testamentary trusts after you die.

 

Why are testamentary trusts recommended?

Testamentary trusts are widely recommended by Australian solicitors because they are inexpensive to run and provide extremely valuable asset protection and tax minimisation opportunities to beneficiaries.

Inheritances are protected from family law claims

Testamentary trusts 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 helps to protect their inheritance from family law property proceedings following a divorce or a de facto break-up.

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Inheritances are protected from bankruptcy

Testamentary trusts provide protection to your beneficiaries from the repercussions of bankruptcy.

 

Since the assets are not owned personally by the beneficiary they 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.

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Significant 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. The trustee of the testamentary trust (normally the primary beneficiary) has complete discretion to determine who receives the income of the trust. Tax is paid on the income of the trust at the marginal tax rate of the beneficiaries who receive it.

 

Therefore, by selecting beneficiaries on low marginal tax rates, the trustee can minimise the tax liability of the trust. The trustee can choose to distribute income to minor beneficiaries of the trust with each beneficiary being able to receive up to $18,200 of income tax-free to pay for education and living expenses.

For a one million dollar estate that is invested for a modest 5% return, this equates to $50,000 income per year, which if distributed among children or low-income family members could equate over ten years to half a million dollars tax saved for the benefit of your family rather than the ATO.

Significant 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. Holding the assets of an estate within a trust offers the beneficiaries an opportunity to defer the need for the sale of assets (and therefore capital gains tax) until later when more numerous beneficiaries come into existence. Tax deferred is tax saved.

Summary

Testamentary trusts substantially protect inherited wealth from a host of common problems and circumstances that lead to inherited wealth being lost, confiscated and wasted, such as; 

  • A divorce;

  • A de facto relationship breakdown;

  • A bankruptcy;

  • Being sued professionally;

  • A business failure;

  • Debts to creditors;

  • Other money problems;

  • A mental health issue;

  • A drug or gambling addiction.

 

Testamentary trusts also provides opportunities to:

 

These extremely valuable protections and financial advantages can last for 80 years. Testamentary trusts are also able to be passed across generations creating a long term protected financial legacy for your family. Testamentary Trusts are how smart Aussie families keep their wealth in the family.

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Will Wizard Testamentary Trusts

Wills from Will Wizard ensure that every beneficiary, including the bloodline lineal descendants of beneficiaries (i.e. their children, grandchildren & so on) are able to benefit from the asset protection and tax minimisation advantages of testamentary trusts

The terms (or rules) of Will Wizard testamentary trusts give beneficiaries the legal and tax flexibility they need to effectively manage their inheritance over time depending on their changing needs, wishes and tax status.

 

Most importantly, Will Wizard testamentary trusts are for the benefit of your nominated primary beneficiaries only, unless a primary beneficiary gives expressed consent for others to benefit from the trust. 

A Will Wizard testamentary trust, and the assets it holds, can be passed down to future generations for up to 80 years, preserving the protections and tax benefits provided by the testamentary trust.

Our comprehensive Wills allow beneficiaries to utilise different types of testamentary trusts to best suit their needs, including All Needs Protected Trusts and Special Disability Trusts. 

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Frequently asked questions

 

One Will for singles

3 years free changes*

Two Wills for couples

3 years free changes*

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All documents included

1. Testamentary Trust Wills

2. Plain language Wills Summary

3. Signing Instructions

4. Guide for Will Owners

5. Guide for Executors

6. Guide for Beneficiaries​

7. Guide to Powers of Attorney

8. Guide To Enduring Guardianship

9. Assets & Beneficiary Loans Record

10. Family Heirlooms & Chattels Record

11. Social Media Data Record

12. Pet Guardian Nomination Record

Plus

- Secure Will Wizard Portfolio

- Free Secure Delivery

- Asset & Family Protections

- Tax Advantages

- Protections Can Last 80 Years

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* All Will Wizard customers receive two free Will updates per year for three years. For each Will update you can alter any original online nominations and preferences. Delivery charges may apply.

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Case Studies

This short series looks at the different personal and financial consequences of one family when the parents rely on a standard Will verses when they rely on a comprehensive Will that provides testamentary trusts and other modern risk preventative measures.

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It's Free & Easy To Try!

Part One - 2 mins

It's so easy we can't wait for you to try.

 

All we need are basic details like names and dates of birth and our experts will take care of the rest.

 

We provide free changes to your Wills & free delivery of your Wills portfolio.

We help you make key nominations.

We help you create your security profile.

We guide you through basic decisions

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Part Two - 5 mins

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Part Three - 3 mins

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