Will Wizzard_Logo_2018_.jpg

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.

Girl sitting on safe

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?

Man on computer

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.

Document

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.

Happy family

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.

Mother with children
 

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. 

Solicitor reviewing document
 

Frequently asked questions

How do testamentary trusts work?


Testamentary trusts are written into comprehensive Wills and can only be used by a beneficiary after the Will owner dies. In every Will from Will Wizard, there is 12-page segment dedicated to providing testamentary trusts to beneficiaries.

A testamentary trust is not something a Will owner needs to ‘create’. They are already written into the comprehensive Will, waiting to be established by your executor for your beneficiaries after your death. All a Will owner has to do is purchase, and sign, a comprehensive Will.

After the Will owner dies, their comprehensive Will becomes a beneficiary’s testamentary trust document. The document then sits in a drawer, or with their accountant, until it is needed by the beneficiary at tax time.

A beneficiary names their trust (i.e. John Smith Holdings) and receives a tax file number for their trust. 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 are able to minimise tax and protect inheritances from third-party threats such as during a divorce or bankruptcy.

The annual accounting costs of a testamentary trust are usually only $300 - $500. Considering the tax benefits & protections, it is a small price to pay.

IMPORTANT:

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




Do all Wills from Will Wizard provide testamentary trusts?


Yes.

There is no sensible argument against relying on a Will that gives your beneficiaries the option to utilise testamentary trusts given the tax minimisation opportunities and asset protection benefits testamentary trusts provide.




Are testamentary trusts expensive to establish and manage?


No, they are not expensive. Especially when the tax minimisation opportunities and asset protection benefits of trusts are considered.

Establishment costs
The establishment costs charged by an accountant and/or solicitor are minimial and should form part of the normal estate administration costs handled by the executor on behalf of the estate. An estimate cost for establishment would be approximately $1,000 to $2,000 depending on the rates charged by the accountant and/or solicitor. Managment costs

Each year a beneficiary must submit a simple tax return for their testamentary trust(s). The accounting costs should only range from a few hundred dollars to around a thousand dollars depending on complexity and the rates charged by the accountant.

Should loans be made by the trust, minutes will need to be submitted also which may increase the management costs slightly.




What are the main advantages of testamentary trusts?


Testamentary trusts help beneficiaries protect inherited assets during events like a divorce, and from financial problems like bankruptcy. Testamentary trusts also help beneficiaries to minimise their tax obligations long-term. Testamentary trusts can last for 80 years, with the benefits passing from one generation to the next.

Let’s look at the four main advantages in more detail.

Testamentary Trust Advantage #1

Testamentary trusts help protect inheritances from family law claims

Relationships last 10 years on average, so it is statistically probable that a beneficiary will go through a divorce, or de facto break-up after you pass away.

How do testamentary trusts help?

With the inheritance held by a testamentary trust, inherited assets are isolated from the beneficiary’s personal assets. This means the inheritance would not form part of the disputing couple’s combined assets that are up for grabs in Family Court proceedings.

Testamentary Trust Advantage #2

Testamentary trusts protect inheritances from bankruptcy or owing money to creditors, like a bank.

How?

Assets held by a testamentary trust are not personally owned by the beneficiary, and therefore do not form part of the beneficiary’s personal assets.

Therefore, a person or company claiming against the beneficiary that is having financial problems cannot obtain the inheritance held by the testamentary trust.

Testamentary Trust Advantage #3

Testamentary trusts give beneficiaries the option to reduce their personal income tax.

How?

Beneficiaries distribute income from the investment of their inheritance to family members on low tax rates.

A beneficiary can distribute up to $18,200 of income from their testamentary trust, tax-free, to pay for a family member’s education and living expenses.

For an $800,000 estate, earning a modest 5% return, this equates to $40,000 income per year.

With this income distributed to multiple children - over ten years this would mean $400,000 for your beneficiary's family rather than the ATO.

Testamentary Trust Advantage #4

Testamentary trusts allow beneficiaries to reduce capital gains tax.

How?

Beneficiaries are permitted to distribute capital gains from their testamentary trust to family members on a low or nil income.

This way the capital gains tax liability from inherited wealth can be significantly reduced each year.

Also, capital gains tax is not triggered when an asset belonging to you passes via your Will, to a testamentary trust.




Are beneficiaries forced to share a single testamentary trust?


No. Forcing beneficiaries to share a single trust can easily lead to disputes. However, if beneficaireis are provided with the appropriate professional advice in favour of sharing a single trust, Wills from Will Wizard can accomodate this without issue.




Who is the trustee (i.e. the controller) of a beneficiary's testamentary trust?


The trustee is the person appointed by a beneficiary to manage and control their testamentary trust.

Most beneficiaries choose to appoint themselves as the trustee.

If the beneficiary is over your nominated controlling age, most beneficiaries choose to appoint themselves as the trustee, unless they choose to nominate other persons to act as trustee for them, or they could choose to nominate a private company or corporate trustee.

If a beneficiary is under your nominated controlling age, your executor or their legal representative will act as trustee until the beneficiary reaches your controlling age. Young beneficiaries still have access to funds for their welfare, well-being, education, housing, family & medical needs.

No matter who acts as trustee, the trust assets and trust income are for the benefit of the beneficiary only unless the beneficiary gives permission for someone else to benefit - like their children.

In Wills from Will Wizard, there are a set of defined circumstances where a beneficiary is not permitted to be the trustee of their own trust.

When inherited wealth is at high risk, your beneficiary can be temporarily replaced as trustee by your executor, or the executor's legal representative. The trust assets and income are still for the benefit of the beneficiary only.

This is a common and effective legal strategy that helps to further protect the inheritance during a beneficiary's divorce, or during a beneficiary's financial problems or bankruptcy. This strategy could also be used if the beneficiary develops a serious addiction issue or a mental health concern.

Beneficiaries at risk still have access to funds for their welfare, well-being, education, housing, family & medical needs.




Are Will Wizard testamentary trusts practical?


Yes. Will Wizard testamentary trusts are extremely practical.

- They are simple and inexpensive to run;

- They can adapt to suit your beneficiaries’ changing needs and tax status;

- They can be ended if the beneficiary decides to reside full-time overseas;

- They can help to minimise disputes between beneficiaries.





 

One Will for singles

3 years free changes*

Two Wills for couples

3 years free changes*

Box

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

Woman watering plants

* 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.

Paypal logo

Will Wizard® accepts all major debit and credit cards.

Visa logo
Mastercard logo
American Express logo

At Will Wizard®, we rely on Stripe, the world's leading verified payment operator. Learn more

Stripe logo

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.

Woman in car
Easter family
Kids in backyard
Kids in costume

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

Form-on-mobile.jpg

Part Two - 5 mins

|

Part Three - 3 mins

Anne-testimonial-Imgae-home-page.jpg
laptop computer

Have questions?

Help desk image

We'll get back straight back to you.