Protecting your assets and minimising tax through a testamentary trust could save your loved ones heartache as well as money.
A testamentary trust is a trust created by a will. But instead of the assets of a deceased estate being distributed to the beneficiaries, assets are retained in a trust for the benefit of the beneficiaries.
HOW DOES A TESTAMENTARY TRUST PROTECT YOUR ASSETS?
Testamentary trusts are not owned by the beneficiaries and therefore can offer a level of protection from the beneficiaries’ creditors or, in the event if a marital breakdown, their spouse.
WHAT ARE THE TAX BENEFITS OF A TESTAMENTARY TRUST?
The assets of a testamentary trust allow the taxable income of the estate to be taxed more effectively in three ways:
Income may be distributed to those beneficiaries who pay the lower rate of tax.
Adult tax rates are applied to children under 18 years of age, but children not taxed at the penalty tax rates that normally apply to unearned income over $416. This applies to all beneficiaries of the testamentary trust and therefore can include the grandchildren of the deceased.
As the assets of the testamentary trust are not assets of the beneficiaries, they do not form part of the asset test for eligibility for Government assistance.
WHO HAS CONTROL OVER THE ASSETS OF THE TESTAMENTARY TRUST?
The control of the testamentary trust lies with the trustee of the testamentary trust as set out in the will. The trustee can be any person, group of people, or company. Often the surviving spouse is the trustee until death and then control is passed to the children.
DO ALL ASSETS OF THE ESTATE NEED TO BE TRANSFERRED TO THE TESTAMENTARY TRUST?
No. Any specific assets can be distributed to any beneficiary, rather than being passed to the testamentary trust. Usually the will is structured so that the personal belongings and household effects of the deceased are passed to the surviving spouse or children, as there is no benefit in transferring them to the testamentary trust. Often we leave the careful drafting of our wills until we believe every other issue has been dealt with. This is not a recommended strategy. It is more important to have a current will to deal with the situation as it is now and to provide for the future (such as the use of a testamentary trust) – if need be, your will can always be amended at a later time.
To find out if you could benefit from making provision in your will for a testamentary trust, call one of our Walker Wayland Advantage advisors.