5 Rea­sons why you might need tes­ta­men­tary trusts in your will

A tes­ta­men­tary trust is a trust that is cre­at­ed under a will and comes into effect after you die. Here are five rea­sons why tes­ta­men­tary trusts are a great struc­ture to con­sid­er in your estate planning.

1. Asset pro­tec­tion

Assets under a tes­ta­men­tary trust are held and man­aged by a trustee (as appoint­ed by you) for the ben­e­fit of your nom­i­nat­ed ben­e­fi­cia­ries. As a result the ben­e­fi­cia­ries do not own the assets of the trust, rather, they are eli­gi­ble to ben­e­fit from them. This offers added pro­tec­tion to your ben­e­fi­cia­ries’ inher­i­tance should a ben­e­fi­cia­ry one day come under attack from cred­i­tors, for exam­ple in a bank­rupt­cy sit­u­a­tion or in some cas­es, in a fam­i­ly law matter.

2. Main­tain­ing fam­i­ly wealth

A tes­ta­men­tary trust can be set up so that only your lin­eal descen­dants or blood rel­a­tives may ben­e­fit from the trust, mean­ing that your fam­i­ly wealth is pro­tect­ed for future generations. 

3. Pro­tect­ing vul­ner­a­ble beneficiaries

In the same way that tes­ta­men­tary trusts can pro­tect the assets of the trust, they can also pro­tect the nom­i­nat­ed ben­e­fi­cia­ries. This can be achieved by appoint­ing an inde­pen­dent per­son to be the trustee of the trust rather than the ben­e­fi­cia­ries them­selves. By sep­a­rat­ing the aspects of con­trol and ben­e­fit, an inde­pen­dent trustee can make pru­dent deci­sions for ben­e­fi­cia­ries who are either inca­pable of man­ag­ing their own affairs (due to spend­thrift ten­den­cies, addic­tions, age or dis­abil­i­ty) or are vul­ner­a­ble to exploitation. 

4. Tax sav­ings

If a ben­e­fi­cia­ry receives their inher­i­tance in their per­son­al name, they are taxed on any income and cap­i­tal gains acquired from the invest­ment of their inher­i­tance at their per­son­al mar­gin­al tax rate. How­ev­er, if a ben­e­fi­cia­ry of a tes­ta­men­tary trust under the age of 18 years receives income from the trust, they are taxed at adult rates, rather than the penal­ty rates that apply should income be received by a child from a nor­mal dis­cre­tionary trust estab­lished dur­ing your lifetime.

5. Tax flex­i­bil­i­ty

By using a dis­cre­tionary tes­ta­men­tary trust, any income gains, cap­i­tal gains and franked div­i­dends earned from your estate assets after you die, can be dis­trib­uted among your fam­i­ly ben­e­fi­cia­ries each year in the most tax-effi­cient way, such as by dis­trib­ut­ing to your ben­e­fi­cia­ries who are not earn­ing any income or to those who are earn­ing in the low­er tax brackets.