What is a Testamentary Trust and why you should consider it in your will

Testamentary Trusts is an aspect of Estate Planning that often comes up in Estate Planning discussions but very rarely understood.

Some people think estate planning is only for wealthy people, however, the aim of this article is to highlight that this is not the case and it is important for each and every one of us.

What is a testamentary trust?

Currently the term Testamentary Trust is generally referred to as the equivalent of a Discretionary Family Trust that many families, have is part of the drafting of a will.

The main advantages:

1. Taxation savings by using income splitting and minor children
2. Some asset protection from creditors and matrimonial disputes
3. Flexibility to be adapted to different situations
4. Better than holding assets in an individual name

New Trends

The traditional ‘husband and wife will’ that leaves everything to each other is  now being replaced by a will that has a testamentary trust(s) controlled by the surviving partner so the spouse and children are beneficiaries.

Also grandparents are making use of Testamentary Trusts as a means of providing education trusts for their grandchildren which maximises tax free income that can be enjoyed by their grandchildren.

Can Testamentary Trusts be challenged?

Yes they can, and they are not 100% guaranteed as certain “eligible applicants” under Family Provision can lodge a claim.  However the benefits of a Testamentary Trusts can often reduce the impact of these claims.

Let’s have a look at a how tax savings occur by comparing the traditional will and leaving everything to a spouse and a testamentary trust that provides for the spouse and children.

Scenario:

A husband dies and has $1,200,000 in super including $1,000,000 term life insurance and leaves a dependant wife and 3 minor children under age 16.

Assume this $1.2m is invested and earns 6% producing $72,000 income

1. In a traditional will arrangement the spouse gets 100%
   1. Tax position:      Income $72,000                Tax $:16,027

1. In a will with a Testamentary (Discretionary Family) Trust sees a different outcome

Beneficiaries:                                    Income                                 Tax

                Spouse                                 18,000                                   nil

                Child 1                                   18,000                                   nil

                Child 2                                   18,000                                   nil

                Child 3                                   $18,000                 nil

                Total”                                    $72,000                 nil

Estimated tax based on the 2013 tax rates and includes MCL.

Please remember to seek specialist legal advice when it comes to formalising your estate planning strategy into a will. For more information on how Azure Group Wealth can help please email ourteam@azuregroup.com.au.

This article is intended to provide general information only, and is not to be regarded as legal or financial advice. The content is based on current facts, circumstances, and assumptions, and its accuracy may be affected by changes in laws, regulations, or market conditions.  Accordingly, neither Azure Group Pty Ltd nor any member or employee of Azure Group or associated entities, undertakes responsibility arising in any way whatsoever to any persons in respect of this alert or any error or omissions herein, arising through negligence or otherwise howsoever caused. Readers are advised to consult with qualified professionals for advice specific to their situation before taking any action.