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Testamentary Trusts

What is a testamentary trust?

A testamentary trust is not that dissimilar to a family trust (set up during one’s lifetime) with the primary differences being that a testamentary trust is established by your will and comes into effect upon your death and there are different taxation rules that apply to testamentary trusts.

A discretionary trust can appoint the chosen beneficiary as trustee, or into some role that may give an element of control of the trust to them, or it can be entirely protective, vesting such control and discretionary power in the hands of another trustee, such as a family member, trusted friend or professional person (accountant, solicitor etc) where an intended beneficiary maybe vulnerable due to their age (minors), disability, risk from attack from creditors or disgruntled spouses or defacto partners or due to poor decision making or financial management skills.

They may also be established for a particular purpose – such as a special disability trust that attracts both taxation and centrelink benefits for impaired persons, a superannuation proceeds trust, allowing for all superannuation proceeds received by the estate to be quarantined off from other estate assets and used only to benefit those that would be entitled to tax free concessions (spouses, minors or dependents of the deceased).

In any testamentary trust, a trustee is appointed under the will to hold assets in accordance with the terms of the trust for and on behalf of the beneficiaries. A discretionary testamentary trust provides flexibility to the trustee to distribute assets or income between different beneficiaries which provides a degree of asset protection (see below).

Protective trusts (discussed above) can be drafted in such a way that if the need for protection was to dissipate in the future (eg upon the beneficiary attaining a certain age, no longer being at risk or otherwise), then control of the trust can be passed to them at a point where the Trustee, in its discretion, considers it safe to do so.

Testamentary trusts can also be a fixed trust (with specific beneficiaries receiving a fixed share of the assets and income of the trust property).

In Queensland, a testamentary trust can last for up to eighty (80) years. However, usually the terms of the Testamentary Trust will allow other circumstances in which the Testamentary Trust can be ended earlier than this, at the discretion of the trustee (which is known as a vesting of the trust).

Any asset of the estate can be left in a testamentary trust, including superannuation death benefits or life insurance proceeds received by or paid into the estate (ie as a consequence of a binding or non-binding death benefit nomination). It is important however that appropriate professional advice is obtained as to the tax consequences that arise from holding different types of assets in a testamentary trust.

What are the advantages of a testamentary trust?

There can be benefit in establishing a testamentary trust including both asset protection and taxation advantages. As mentioned above, use of a testamentary discretionary trust can protect trust assets from claims by disgruntled spouses or defactos seeking to make property settlement claims through the Family Law Act 1974 (Cth) or creditors of the beneficiaries given the discretion that the trustee to distribute assets and income of the trust property to beneficiaries.

The trustee can decide which beneficiaries to pay from the capital and income of the Testamentary Trust (subject to the wording of the trust).

By distributing or sharing the income between the beneficiaries, the Trustee is able to manage the total income tax payable by the group. Under a Testamentary Trust, minors can obtain the benefit of the tax free threshold, low income rebates and varying tax brackets.

Additionally, under the present taxation legislation, income from testamentary trusts can be treated as ‘excepted income’ for taxation purposes. This means that distributions to beneficiaries who are minors will receive the benefit of the tax-free threshold. Pursuant to Div 6AA of the Income Tax Assessment Act 1936 (Cth) and in particular, s 102AG(2)(a)(i), excepted trust income is the amount which is assessable income of a trust estate that results from the will, codicil or court order varying the will or codicil. This effectively means that where the testamentary trust may acquire income or capital from other sources (such as after the testator’s death or possibly even from another testamentary trust, inter vivos trust or another will), then certain taxation benefits may not apply to such income or capital.

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