Estate Planning & Testamentary Trusts

For an increasing number of high net worth individuals with complex professional and personal affairs, the question of how best to approach long term estate planning and in particular, what is likely to be the best way to both transfer and preserve wealth for the benefit of successive generations of family, is becoming an important issue.

Effective use of testamentary trusts

The primary advantage of a testamentary trust is that it allows an individual who has acquired significant wealth to exercise a greater degree of control over how that wealth will be distributed to beneficiaries not just immediately after death but potentially for multiple future generations.

Testamentary trusts are well suited to blended family situations or where a testator has concerns that a first generation beneficiary such as a spouse or child may dissipate the asset base leaving little if anything of the testator’s legacy and wealth to be passed on to future generations.

Importantly, testamentary trusts can also be utilised to gain potentially significant tax savings. Ordinarily, income distributed to a child under 18 will be subject to a flat rate of tax without the benefit of a tax free threshold or marginal tax rates. However, provided a testamentary trust is correctly established and care is taken as to how it is administered and income distributions to any minors are recorded, child beneficiaries may qualify for these tax concessions on income received from the testamentary trust. For high net worth individuals this can amount to a considerable tax saving and aid in the preservation of additional wealth that might otherwise be lost to tax for future generations.

Additional tax advantages may be gained by keeping real property assets within a trust which ensures that a liability for Capital Gains Tax (CGT) that would ordinarily arise on the distribution of assets does not arise.

Testamentary trusts are also an excellent vehicle for protecting bequests from future life events such as business failures and relationship breakdowns.

Issues to consider

The trustees of a testamentary trust will have absolute discretion concerning decisions on the distribution of trust income. Accordingly, it is essential that any trustees appointed to administer a testamentary trust fully understand the most tax effective approach to asset and income distribution and are kept apprised of any changes in tax laws in respect of income derived from testamentary trusts, particularly in the case of minor beneficiaries.

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It is also of critical importance that trustees understand any limitations on tax benefits may be imposed if the transfer of assets or income from the trust is found to be a nonarm’s length arrangement and to take steps to ensure that any testamentary trust is appropriately structured so as to avoid as far as possible this type of issue.

Primary residences as part of a testamentary trust

Another area for consideration when establishing a testamentary trust is that a testator’s primary residence is usually a CGT exempt asset. An issue may arise as to whether this tax exemption remains on foot if the primary residence forms part of the asset base for a testamentary trust.

In circumstances where the primary residence may be worth many millions of dollars this is an entirely relevant consideration. The desire to preserve wealth for future generations may need to be balanced against any potential tax liability that may arise at a future date if the testator’s primary residence is included in the trust rather than passing as an outright gift at the time of death.

It may be necessary to consider whether multiple testamentary trusts need to be set up to overcome potential problems of this kind with the testator’s primary residence possibly held in a separate trust from any other assets of the estate.

Protection of assets

A further advantage of testamentary trusts is that a testator can take steps to protect his or her assets from attacks by creditors of one or more beneficiaries after death.

This stricture also applies to Family Court proceedings where the Court will not generally consider assets that are held in a testamentary trust to be assets owned by an individual for the purposes of dividing up assets of the relationship. This protection is less likely to apply if an asset is simply transferred to an individual at the time of the testator’s death.

A carefully structured testamentary trust can provide peace of mind for the testator and allow advance planning for the benefit of subsequent generations.

In order to achieve optimum results and wealth preservation it is essential that early consideration is given to how best to achieve an individual’s desired aims through this type of structure. Our expert lawyers can advise you and work with you to develop a future proof plan.

If you or someone you know wants more information or needs help or advice, please contact us on (03) 9600 0162 or email info@lordlaw.com.au.