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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.

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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.

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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

  • 1. Cancellation and Declaration
    This clause cancels or revokes any previous Will or Codicils which you may have made. Have questions?
  • 2. Segments
    This clause outlines the various Segments of your Will to help make your Will simple to navigate and understand. Have questions?
  • 3. Expressions
    This clause names your spouse and names your children. This clause also sets a Controlling Age which is a sensible precaution preventing a beneficiary from taking complete personal control of their inheritance until they reach the age you have nominated. Children under the Controlling Age still have access to funds for important things like education, housing, medical treatment and general well-being expenses, but won’t be able to use large amounts of their inheritance on immature purchases. This clause also includes a general statement authorising persons appointed to any roles under your Will (e.g. Executors, trustees etc.) to act jointly or, if only one survives, to act alone.
  • 4. Executors and Trustees
    This clause nominates your first and second choice executors. It is important to note that you should review and update your Will if any of your named Executors pass away or become unavailable for other reasons. Will Wizard provides three years free changes to assist with this. Due to the long-term asset protection and tax minimisation opportunities that our sophisticated Wills can provide beneficiaries, this clause also includes a sensible recommendation to your executors and primary beneficiaries to consult with a professional financial adviser, accountant and/or experienced estate planning lawyer in respect of any dealings with your estate assets. Our online form allows you to provide details of your current advisors or to simply include a general recommendation to seek professional advice. To allow each beneficiary full, free and flexible control over their inheritance, this clause also states that each primary beneficiary is the trustee (or ‘controller’) of their respective share of your estate. Additionally, one the key safeguards that this Will provides is for your executors to take over as trustee if a primary beneficiary is a bankrupt, incapacitated, experiences a divorce, a relationship breakdown (or other third party threat), or has not reached your nominated Controlling Age. Have questions?
  • 5. Initial Administration
    This clause outlines your executors’ first initial duties and priorities following your death, namely dealing with the initial testamentary expenses, creditors and death benefits, and refers your executors to the authorities and powers provided to them to ensure your estate is distributed as per your wishes in the most efficient way possible. Have questions?
  • 6. Testamentary Expenses
    This clause outlines to your Executors what are to be treated as testamentary expenses. Testamentary expenses are those expenses incurred in the management of the estate. Have questions?
  • 7. Personal & Household Possessions
    This clause outlines the gifts of personal and household possessions or ‘Chattels’ that you wish to leave to specific people. The clause references any lists you have left with your Will portfolio or other ‘personal papers or files’. The list must be signed and dated by you. Relying on a list that is separate to your Will saves you from having to continually update your Will should you wish to add to or amend your list. All Will Wizard portfolios include a Family Heirlooms and Small Chattels Record to record your gifts of personal chattels. Have questions?
  • 8. My Estate Distribution
    This clause states that the balance of your estate goes to your spouse or (de facto partner) as the primary beneficiary of a testamentary trust that your spouse controls. The ‘balance’ of your estate is your estate less any specific gifts of purely personal items as per the previous clause 'Personal & Household Possessions'. Inheriting via a testamentary trust can provide important asset protection and tax advantages to your spouse. All Will Wizard testamentary trusts are optional (a beneficiary can choose to use a trust or not), individual (each beneficiary gets their own trust) and discretionary (each beneficiary has complete control over their own trust). Have questions?
  • 9. If My Spouse Does Not Survive Me
    This clause stipulates that if your spouse (or de facto partner) dies before you or within 30 days of your death, the clauses following this clause apply. Have questions?
  • 10. Guardians (optional clause)
    This clause is optional, and if you do choose to nominate a guardian, only becomes relevant if you and your spouse both died leaving children under 18 years of age. The purpose of the clause is to nominate the people you would prefer to be appointed as guardian of your children. While this nomination via your Will is non-binding, it is sensible for a Will Owner who has young children to make it clear via their Will who their guardian preferences are. This clause also directs your executors to ensure that your children’s lifestyle is maintained, and provides wide powers to your executors to allow funds to be made available for education, development and advancement to a standard applicable at the date of your death. The appointment of a guardian is subject to Court approval and there is always the possibility that a Court may exercise its overriding discretion to appoint or remove a guardian other than your nominated guardian. Your children may wish to reside with someone other than your nominated guardian. In these circumstances the Court as always would take your children’s best interests into account in deciding the issue. The guardian must ensure that the child is appropriately housed, clothed, cared for and educated, and must make important ‘life decisions’ for the benefit of the child. Have questions?
  • 11. Small Financial Gifts (optional clause)
    This clause lists the people and/or organisations (if any) you have nominated to be recipient of small financial gifts. Gifts are limited to $15,000 AUD. These small financial gifts will be made on the death of the last of you and your spouse. Have questions?
  • 12. My Remaining Estate Balance
    This clause divides the remaining balance of your estate between your surviving children, with each surviving child able to receive their inheritance in a separate testamentary trust they control. If you have nominated for your children to inherit equally then this distribution is subject to the Benefit Adjustment provision in Segment 2 that aims to protect inheritance equality. The terms applying to any 'beneficiary controlled testamentary trusts' created by your Will are set out in Segment 3. The beneficiary controlled testamentary trusts are optional, meaning beneficiaries do not have to receive their inheritance via a testamentary trust, discretionary, meaning they have full control over their own trust, and individual, meaning that two or more children do not have to share control of a single testamentary trust, thereby reducing the potential for tension and conflict between them. Inheriting via a testamentary trust can provide long term asset protection and tax minimisation opportunities to beneficiaries. Have questions?
  • 13. Direct Descendants
    This clause states that, in the unlikely case of your children dying before you, leaving children of their own (i.e. your grandchildren), the share of any deceased child is to be divided equally between any children of your deceased child. As with your children, this distribution is based on providing grandchildren to benefit from the option to inherit via a separate testamentary trust that they control (once they have reached your nominated Controlling Age. Furthermore, and while highly unlikely, this clause states that the share of any deceased grandchild flows down to their children if any (i.e. your great grandchildren), thereby distributing your estate to direct descendants. Have questions?
  • 14. Back-Up Estate Distribution Plan
    As the name of this clause suggests, having a back-up plan for your estate is a safeguard that while unlikely to be needed, is important to include. It states what is to happen to your estate if none of the persons referred to in the preceding clauses live to inherit as a primary beneficiary of your Will. Without this provision there remains a small chance that your estate could end up in the hands of the State. Have questions?
  • 15. Earlier Vesting
    This clause ensures that a beneficiary does not ‘miss out’ because they have not attained the Controlling Age by the time the trust ends. Have questions?
  • 16. My Organs (optional clause)
    This optional clause expresses your non-binding wishes concerning organ donation. For information about The Australian Organ Donor Register, where you can record your legal decision to become an organ or tissue donor after death, go to: https://register.donatelife.gov.au/ Have questions?
  • 17. My Mortal Remains (optional clause)
    This optional clause expresses your non-binding wishes regarding whether you are to be buried or cremated. Your executors make the final decision regarding your mortal remains. Have questions?
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One Will for singles

3 years free changes*

Two Wills for couples

3 years free changes*

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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