Business and Finance, Testamentary Trusts
by Craig Coetzee
One way of creating an effective and flexible estate plan is to include the option for a Testamentary Trust in your will.
A testamentary trust (TT) is a trust created from a will. Instead of all of the assets of a deceased estate being distributed to the beneficiaries, some or all are retained in a trust for the benefit of beneficiaries. It provides the option of either a discretionary or fixed trust with each providing different benefits.
The persons nominated as trustees of a TT have the ability to determine which beneficiaries receive distributions and the timing and amount of distributions. Alternatively, the Trust may provide for fixed entitlements for beneficiaries, although flexibility is recommended to retain the advantage of any tax planning opportunities. It is important to consider carefully who are to be the trustees of the TT. They should be persons who you know have some financial management skills and can be trusted to act in the best interests of the beneficiaries.
Tax minimisationA TT allows for tax effective income distribution. Through flexibility of distribution of income the TT effectively lowers the rate of tax paid on estate income. The diagrams below illustrate the potential tax benefits of using a TT.
With a Testamentary Trust
Assume $100,000 in taxable income and beneficiaries have no other income
PARTNER $25,000CHILD 1 $25,000CHILD 2 $25,000CHILD 3 $25,000
Total tax payable for partner and 3 children will be $12,900 or effective
However, you must be careful as any income not distributed to beneficiaries each year is taxed at 46.5% in the hands of the trustee.
With No Testamentary Trust
Assume $100,000 in taxable income and beneficiaries have no other income
PARTNER $91,999CHILD 1 $2,667CHILD 2 $2,667CHILD 3 $2,667
Total tax payable for partner (no tax payable by children as $2,667 is the current tax free threshold applying from 1 July 2008 for minors after allowing for the low income rebate) will be $24,179 or an effective tax rate of 24.17%.
WillTT is created
Testamentary Trust(Discretionary or Fixed)Trustees selected, trustees run the trust
BeneficiariesPartnerChildrenGrandchildren
Asset protectionA well drafted TT may also assist to protect the assets of beneficiaries of the estate. As the TT is not owned directly by the beneficiaries it can offer a level of protection from creditors. It can also provide protection of your estate for subsequent generations as the assets will never be directly available in property settlement disputes, be available for spendthrift children, or in the event of matrimonial breakdown. The family court may however have some regard to assets in a TT and could adjust the assets outside of a TT in determining the asset split between a husband and wife.
If a beneficiary is not capable of handling their own financial affairs or have special needs, you could leave part of your estate for that persons benefit by naming them as the primary beneficiary (but not a trustee) of a TT. It prevents abuse of the trust assets by unscrupulous people or irresponsible individuals.
A TT within a will allows beneficiaries the flexibility and choice that a normal or standard will simply cannot match and is not just for the wealthy. A well-planned TT can last for up to 80 years after the death of the will maker, and can provide ongoing asset protection with significant tax savings for partner, children, grandchildren and great-grandchildren.
You should consult your accountant, solicitor and financial advisor, to ensure that you are aware of all the advantages, disadvantages, costs and responsibilities before you make the decision to include this in your will.
The above comments provide only a general overview of the concept of a TT. Specific advice should be sought in relation to your personal estate planning needs.
Call WHK today for more information.
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