Testamentary Trusts

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What is a Testamentary Trust?

A testamentary trust is a special type of 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”.

Upon the death of the Testator, the property and assets of the deceased estate that the Testator wishes to leave to the trust are transferred to a trustee who holds on trust for the benefit of the trust’s beneficiaries. Testamentary trusts have considerable taxation and other financial planning advantages compared to a discretionary (family) trust or an estate with no trust structure. The potential benefits of a testamentary trust are as follows:

Tax Treatment

Current taxation legislation allows income from testamentary trusts to 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 in certain circumstances.

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 case of family law orders against a beneficiary.

CONTROL

Testamentary trusts offer Testators greater control and flexibility over the assets of the Estate, including how and when they are distributed, and essentially allows a Testator to rule from the grave.

Death Benefits

Death benefits are usually received as 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 a personal representative receives are treated as income to which no beneficiary is entitled and taxed accordingly. If a death benefit is received directly by a ‘death benefit dependant’ it is tax-free regardless of the payment size.

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 helpful in this respect by allowing flexibility concerning 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.

Contact the Ramsden Commercial team for any Testamentary Trusts queries here.

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