Testamentary Trusts

WHAT IS A TESTAMENTARY TRUST?

A testamentary trust is a trust established by a will. It does not come into effect until after the death of the person making the will, referred to as the testator (male) or testatrix (female).

Upon the death of the testator or testatrix, property of the deceased estate is transferred to a trustee who holds the assets on trust for the benefit of the beneficiaries of the trust. Testamentary trusts have considerable taxation and other financial planning advantages as compared with a discretionary family trust, or an estate with no trust structure in place. The potential benefits of a testamentary trust are as follows:

TAX TREATMENT

Current taxation legislation allows that income from testamentary trusts 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.

ASSET PROTECTION

A testamentary trust may provide benefits in terms of asset protection where a beneficiary faces the prospect of bankruptcy and may be protected from creditors. Similarly, assets held within a testamentary may be protected in the event of family law orders against a beneficiary.

DEATH BENEFITS

Death benefits are usually received in the form of a ‘superannuation death benefit’ or a ‘death benefit termination’ benefit. These benefits are often received by the personal representative of the estate in their capacity as executor. Benefits received by a personal representative are treated as income to which no beneficiary is presently entitled and taxed accordingly. If a death benefit is received directly by a ‘death benefit dependant’ it is tax free regardless of the size of the payment.

In order to maximise the tax treatment of death benefits they should be paid directly to a ‘death benefit dependant’. Depending on the makeup of the beneficiaries this may result in one beneficiary receiving a greater share of the estate assets. A testamentary trust may be useful in this respect by allowing flexibility in relation to the other estate assets, and allowing an equal distribution while maximising the tax benefits of the death benefit.

HOW LONG DOES THE TESTAMENTARY TRUST LAST?

A testamentary trust can last for up to eighty (80) years. However, there will normally be a right for the trustee of the trust to terminate it on an earlier date, in which case all trust assets will be completely distributed to the beneficiaries.

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