Do You Need A Testamentary Trust?

Trusts have long been recognised in Queensland as a valuable tool for tax planning and asset protection, particularly for people in business or those with complex family arrangements.  

Many people avoid thinking about what happens when they die, but careful planning can make things much easier for loved ones during a difficult time. A testamentary trust may help achieve that.

So What Is A Testamentary Trust? 

 A testamentary trust is a trust created by your Will. Instead of leaving assets directly to beneficiaries, your Will directs that all or part of your estate is distributed to one or more trusts that come into effect after your death. 

Every Will includes some element of trust, for example, your Executor holds assets “on trust” while administering your estate. However, a testamentary trust continues after the administration of your estate and provides long-term control and protection of your assets. 

These trusts can be discretionary or fixed: 

• Discretionary testamentary trust: The Trustee decides how to distribute income or capital among a group or class of beneficiaries (for example, children or grandchildren). 

• Fixed testamentary trust: Each beneficiary is entitled to a specific benefit for a fixed time or purpose (for example, allowing a spouse to live in the family home for life or until they can no longer reside there). 

What Are Benefits Of Testamentary Trusts? 

Taxation 

Income from a testamentary trust can be split between beneficiaries to take advantage of their different marginal tax rates. 

Children under 18 can be taxed at normal adult rates on trust income, enjoying the full tax-free threshold (currently around $18,200) rather than the lower limit ($416) that normally applies to unearned income for minors. 

Testamentary trusts can also provide flexibility for managing capital gains tax (CGT) and stamp duty and can sometimes reduce tax payable on superannuation death benefits paid to your estate. 

Education 

Income from a testamentary trust can be used for a child’s education, maintenance or advancement without incurring additional tax. 

Protecting your Assets 

If you leave assets directly to a beneficiary, those assets can be exposed to claims from creditors or bankruptcy. Holding them in a testamentary trust can protect the assets if a beneficiary’s financial circumstances change or if they are in business and face personal liability risks (eg. Bankruptcy).  

Marital Problems 

If a beneficiary divorces or separates, assets held in a testamentary trust are generally less likely to be treated as matrimonial property and therefore may not be available to the ex-spouse in a property settlement. 

You may also prefer to protect an inheritance from being lost through a spouse’s poor financial decisions or risky ventures. 

High Risk Beneficiaries 

Where a beneficiary works in a high-risk occupation or industry, a testamentary trust can protect their inheritance from potential legal or financial claims. 

Vulnerable Beneficiaries  

A testamentary trust can be structured to provide lifelong support for beneficiaries who are unable to manage their own affairs, for example, due to disability, addiction, incapacitation or poor financial judgment.
 

It can also be designed to provide accommodation and financial support to a beneficiary receiving Centrelink or NDIS benefits without affecting their entitlements. 

Preservation for Future Generations 

A testamentary trust can ensure that assets stay within your family line, passing to your children and grandchildren, rather than being lost through divorce, poor financial management or external claims. 

Controlled Distributions Over Time 

For younger beneficiaries, a testamentary trust allows you to control how and when they receive their inheritance, rather than providing a large lump sum that could be spent frivolously. This can provide long term stability and support through education, property purchases or major life stages. 

What Are The Disadvantages Of A Testamentary Trust? 

• Ongoing costs: The trust must lodge annual tax returns and maintain accounts, which can involve accounting and administrative expenses. 

• Complexity: Testamentary trusts can be more complicated to set up and manage. The will-maker must clearly understand the structure, and professional legal and accounting advice is strongly recommended. 

• Trustee issues: Choosing the right trustees is crucial. Disputes between trustees and beneficiaries can cause family conflict. 

• Possible legal challenges: As with all Wills, a testamentary trust Will can be challenged by eligible family provision applicants, such as a spouse or child who feels they have not been adequately provided for. 

• Tax and duty implications: Depending on the circumstances, there may be capital gains tax or stamp duty consequences when assets are transferred into or out of the trust.  

Whether a testamentary trust is right for you depends on your personal, financial and family circumstances. In Queensland, testamentary trusts can provide significant benefits when structured correctly but they require careful planning and professional guidance. 

If you would like tailored advice about whether a testamentary trust will suit your estate or business succession plan, please contact our estate planning team.  

Disclaimer:

The information contained in this article is for general informational purposes only and is not intended to provide legal advice or substitute for the advice of a professional. This information does not consider your personal circumstances and may not reflect the most current legal developments. Should you need advice, please contact our firm for targeted information relating to personal your situation. 

Greenhalgh Pickard’s Wills and Estates Team