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It is amazing how many times I have been told when taking instructions on a new or updated will that “my affairs are quite simple”. That statement may be true of course but simple is a relative term. As an example, if you want to achieve the more common goals of protection of assets and reducing tax, and who doesn’t, then most likely a TTW will be advantageous for you.
A testamentary trust is a trust which is only created upon the death of the testator, and which is specified in his or her will.
In addition, the cost of administering the trust should be justifiable as it has to lodge tax returns. To clarify here, there is no cost until the will maker dies and the trust is then established.
The next consideration is whether you may have grandchildren under 18. Your child may be able to distribute up to $20,542 tax free to them every year from a TTW as they are taxed as adults for TTW distributions. We will come back to this.
So should I have a will at all?
Dying intestate can result in your surviving spouse, family and friends suffering unnecessary financial hardship and emotional stress.
A suitable administrator must be appointed by the Supreme Court of the state in which you reside. This may not be the person who you would have chosen if a Will was made. The administrator’s duties involve arranging the funeral, collecting assets, and distributing them after paying any debts and taxes.
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Is my old will still valid?
A will must be in writing and must be properly signed and witnessed if it is to be valid. Normally two independent witnesses must see the will maker sign the will and must then sign each page of the will as witnesses. The witnesses should be independent and not be related to the will maker because a person who witnesses a will cannot be the beneficiary of the will, so relatives are definitely out.
A divorce does revoke parts of the old will, including assets distributed to the former spouse and any appointment of them as an executor, trustee or guardian.
Can I leave it to my children to decide?
Instead of the automatic establishment of a TTW, your will can in some circumstances provide the beneficiary an option to establish a trust. This is a risky pathway and is not always recommended.
In addition, there may be a second chance to the family of a Will-maker who has not established a testamentary trust. This second chance must be taken advantage of within three years of the date of death of a deceased. That second chance is substantially limited in scope and flexibility.
What can a TTW do for my children and grandchildren?
A beneficiary’s inheritance through their own testamentary trust can be highly beneficial in a number of circumstances.
Unfortunately, the incidence of bankruptcy in our society has increased significantly. Often a wife will guarantee her husband’s business venture and vice versa. To some extent we can all be at risk whether in traditional high-risk occupations or not. However, if the bankrupt’s inheritance has been provided through a testamentary trust it will be protected from creditors.
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As with creditors, an inheritance held within a properly prepared testamentary trust will still be the subject of a Family Court order in the case of a marriage breakup but the outcome will vary if the TTW is well drafted. It may be regarded as a financial resource and have some effect on the terms of a property settlement but this is a preferable outcome to the property being at the disposal of a Family Court order.
The assets of a testamentary trust are not currently taken into account in establishing pension eligibility under the current means tested pension rules. However, income from the trust is taken into account for income test purposes.
Spendthrifts and people with disabilities
It is not uncommon for people suffering a variety of disabilities to be unable to properly manage their financial affairs. At the same time, families wish to ensure that an adequate fund is set up to meet their reasonable needs but so as not to affect any pension rights they may have. The flexibility of a testamentary trust, especially if combined with a memorandum of wishes as to how the trust should be administered, can be an appropriate arrangement.
Although the above features are in themselves good reasons to consider a testamentary trust in your will, the major basis of their popularity is the considerable tax savings which can arise over a discretionary family trust.
Section 102AG of the Income Tax Assessment Act 1936 (ITTA) provides that children under the age of 18 years who receive income from a testamentary trust are taxed on that income as an adult and therefore enjoy the normal tax free threshold of $18,200. Without this special provision of the ITTA trust income to minors has a tax free threshold of only $416 (or $643 if the low income rebate applies) and thereafter the highest marginal rate applies to the minor’s income.
Increasingly, the traditional husband and wife Will ie. each to each other and then to the children is being replaced by a testamentary trust controlled by the surviving spouse and under which the spouse and children are potential beneficiaries. Wills along these lines can if the funds in the trust justify it provide that on the death of the spouse, sub trusts come into existence for the benefit of each child and that child’s family (and would be controlled by the child concerned). Increasingly, grandparents are providing education trusts for their grandchildren which have the added advantage of maximising the tax-free income that can be applied for the benefit of the grandchild.
The trust can be funded by your some or all of your assets and by payments in consequence of your death such as superannuation death benefits or insurance proceeds paid to your estate rather than directly to your dependants or beneficiaries in your Will.
A testamentary trust can continue for a period of 80 years if so required but it is also possible for the testamentary trust to vest at any earlier date if the trustee so decides.
A testamentary discretionary trust has a trustee (or trustees), a range of discretionary beneficiaries (for example, spouse, children, grandchildren) and in some cases an appointor (for instance, the spouse) who controls the trustees. It is the trustee who determines which of the beneficiaries if any, receives any income or capital from the testamentary trust and also the amount of any income or capital they are to receive. Be aware that assets left to children through a testamentary trust must eventually pass to them.
Note: This article is general in nature and cannot be relied on as financial or legal advice.
Michael Kloeckner is the Principal of Protected Estates, a law practice specialising in estate planning and tailored legal documents.
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