The key benefits of a testamentary trust are:

• Increased protection of the inheritance from family law property settlement risks
• Protects immature (and financially immature) beneficiaries
• Income tax flexibility
• You can rule from the grave to some extent
• It can defer tax for overseas beneficiaries
• Bankruptcy protection

Testamentary trusts offer fantastic tax flexibility. In fact, testamentary trusts are the only environment where you can get such great tax treatment, and it’s only because someone had to die for the trust to start (currently, the government does not recognise dying as a tax avoidance strategy… at least for now!). 

In essence, trusts are ‘flow through’ vehicles for tax purposes, which means the income earned each year from investing the trust assets always needs to be distributed out to beneficiaries and each beneficiary gets taxed on the income they received from the trust at their own marginal tax rate.  Each year the trustee can choose which of the beneficiaries should receive the income earned from investing the inheritance each year, which allows them to give income to beneficiaries who have lower tax rates. 

Testamentary trusts offer an additional benefit which is not available to any other type of trust – beneficiaries under 18 are treated like adults for tax purposes which means they can receive about $22,000 tax free each year (and no, you cannot get these tax free amounts now; unfortunately you do have to die before these tax savings start!).

Who will benefit from including a testamentary trust in their Will?

If you meet any of the following criteria then you should consider using a testamentary trust in your will:

• You are leaving at least $500,000 (including super and life insurance) to one or more people.
• You want to leave an inheritance to minors who can each receive approximately $22,000 tax free income each year from investing the inheritance
• It is important to you that the inheritance is protected from relationship risks (e.g. divorce or separation)
• It is important to you that the inheritance is protected the from bankruptcy risks
• You are leaving assets to a beneficiary who cannot be trusted to manage their inheritance appropriately and you are worried they will waste it.

For tailored advice on how testamentary trusts can be used in your estate plan, contact us for an estate planning consultation.