Yes, you read that right! A testamentary trust (similar to a discretionary family trust) in your Will can save you thousands of dollars (or potentially millions if you have valuable estate assets). How important is this?
Imagine that you built a beautiful home for your family, patios and yards included. However, you neglected to install locks on your doors and windows. The beautiful house is there, but it lacks security for your loved ones. So, we can compare the house to your Will, and the locks are the testamentary trust.
You would be surprised by the tax advantages that a proper testamentary trust structure can provide. After all, a testator would want an adequate amount of financial aid or assets for their beneficiaries, right?
This is just the tip of the iceberg for testamentary trusts, so let’s unpack everything you need to know about them.
The Executor’s Job
This trust provides asset protection and only takes effect after the testator (the Will-maker) passes away. But how can the Will-maker administer their estate after their death? This is where an executor steps in.
First, the executor (the person responsible for asset distribution to beneficiaries) will collect the assets and pay the testator’s debts. Afterwards, their role will shift to a trustee, and they will then distribute such assets to the beneficiaries. The role of a trustee or a trustee company manage the assets held in a testamentary trust on behalf of the beneficiaries.
The Effects of a Testamentary Trust
As mentioned, this trust protects a deceased person’s assets until their death. But how does it work? Let’s use an example.
Example 1: Children
Naturally, a testator will leave money for their children after their death. However, children are still not financially knowledgeable and may misuse the money left for them. A testamentary trust will only release this money when the testator dies. The testator can state in their Will that they will only receive the money within a certain time frame
For example, the child will only receive a quarter of the money when they turn 25, another quarter at 27, and the rest at 30. This can also work for a child or beneficiary’s future medical care/expenses.
If the testamentary trust involves minors, they are treated like adults for tax purposes under the testamentary trust. Income distributed to minor beneficiaries (under 18 years of age) from this trust may be taxed at adult rates rather than at the higher penalty rates typically applied to minors. This can result in substantial tax savings.
Example 2: Remarriage and De Facto Relationships
It’s also natural that a testator leaves money for their spouse after their death. It’s a sign of unwavering love and support for their family members even after death. However, what if the testator’s wife does not respect this? What if the surviving spouse remarries, and the new family will benefit from the money and not the current one?
Yes, the testamentary trust can prevent this again! The trust ensures the money stays within your family line, rather than potentially being claimed by a new partner or their children. Similarly, a testator’s child may also go through a relationship breakdown or divorce. This trust offered the same protection and prevented the testator’s child’s ex from receiving the money.
Example 3: Bankruptcy of a Beneficiary
Bankruptcy is a challenging time for any individual. Creditors are always on the lookout for a bankrupt person and give them deadlines on when they should pay their debt. Now, let’s say a testator simply directs money for a beneficiary, and that beneficiary goes bankrupt.
Creditors or bankruptcy proceedings could immediately claim the inheritance to pay off their debts. The intended money for the beneficiary is gone just like that. Disheartening, isn’t it?
Once again, the testamentary trust comes to save the day. A bankrupt beneficiary can still get the money from the testator. However, creditors and third-party claims can not touch or claim the money.
Example 4: Dependents
Not all beneficiaries have to be a testator’s blood relatives. Sometimes they have dependents or organisations who can receive financial aid from a Will. A testamentary trust can help vulnerable beneficiaries or beneficiaries who need special care. This trust can protect them without affecting their access to government benefits.
I’ve Placed a Testamentary Trust in My Will. What Can I Do for Now?
First things first, good job! You exercised your right to provide smartly for your beneficiaries. Did you know that testators can update their Wills from time to time? Some of these changes may range from getting a divorce or selling a property. While you can trust the security of a testamentary trust, it cannot update your Will.
A divorce means having to remove your spouse from your current Will. You may even consider removing your children with your ex-spouse from your new Will. Remarriage? Then you can include your new spouse in your Will and your new children. The same goes for your properties that you may sell. Make sure to remove sold properties and add newly bought ones in your Will.
Read: Factsheet: Importance Of Updating Wills | JB Solicitors
What Should Executors Keep in Mind?
As an executor, you have a big responsibility to handle financial decisions and asset distribution after a testator’s death. So we’ve prepared some tips below so you can carry out your duties effectively:
- Always keep the Will. Always maintain it as you first saw it.
- Make sure to contact beneficiaries regularly about the deceased’s estate. This is your primary duty. Make sure to also make regular contact with the Australian Taxation Office.
- Assess the tax situation of potential beneficiaries to achieve intended tax benefits
- Lodge annual tax returns.
- Keep a detailed financial record! Include trustee resolutions, superannuation fund, financial statements, tax payable on capital gains, trust funds, cost bases, tax rollovers, etc. Under a simple Will with no testamentary trust, your beneficiaries would simply have to take their inheritance in their personal names. As a result, they would pay tax on the income generated from the inheritance at the top marginal tax rate.
- Obtain a grant of probate to legalise the Will. You can start this 6 months after the death of the testator.
- Complete the estate administration within a reasonable timeframe. Delays can cause financial loss, which the executor will shoulder.
Is a Testamentary Trust Expensive?
Yes, a testamentary trust comes with a price depending on the value and size of your estate. But think of the security it can provide not just for your best wishes, but also for your loved ones. One can only imagine the costs if beneficiaries started to argue over a testator’s estate.
“But I need the money and inherited assets more than you do!”
“You shouldn’t even be part of the Will!”
“I’m calling my lawyer about this!”
“I’ll do anything in my power to claim my inheritance”
Sounds messy, right? Such arguments can lead to costs that may even be more expensive than preparing a testamentary trust.
In conclusion, testamentary trusts established in Wills are expensive and have a lengthy process. But the protection it gives your beneficiaries is invaluable and enduring.
Can Lawyers Prepare Testamentary Trusts?
Yes, they can! Our Wills and estate planning lawyers in JB Solicitors are dedicated to creating a Will that protects your best interests and estate. We value what you want and who will benefit from your Will. Prepare an effective estate planning strategy that caters to your financial circumstances today.
Contact us if you want a proper testamentary trust in your Will.
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