We’re excited to welcome Tess Aberline, a seasoned expert in Wills & Estates from Rennick & Gaynor, to our financial services blog! Tess is a friend of Finspective, and our go-to legal expert for estate and succession planning.
With extensive legal knowledge in estate & succession planning, Tess has been providing legal advice for Finspective clients in Melbourne, Geelong & the Surf Coast for over 4 years.
In this blog post, Tess explores the vital role of Testamentary Trusts in estate planning, offering her insights into how they can secure a family’s future. Dive into Tess’s article to understand the importance of these trusts in protecting your legacy.
Welcome guest contributor: Tess Aberline
Tess Aberline (LL.B, B.Soc.Sc) is a Senior Associate for Rennick & Gaynor
Why this lawyer says Testamentary Trusts are the bees’ knees of Wills!
You know it’s important to have a Will in place – you might already have one, maybe from twenty years ago when your first child arrived into the world, and since then, your Will has collected dust in a filing cabinet that is in desperate need of a clean out (no judgment, we’ve all been there!).
It’s time to have another look at your Will. Things have progressed a lot since you prepared your last one. The term “Testamentary Trusts” has been mentioned here and there, and your advisor has suggested Testamentary Trusts might be worthwhile for your circumstances.
So, what on earth is a Testamentary Trust?
Put really simply, a Testamentary Trust is a trust established in a Will, which becomes ‘activated’ when the Will springs into action. This happens when the person who made the Will (aka the Testator) dies.
A Testamentary Trust, in all honesty, doesn’t do all that much for you – it might give you a sense of control and satisfaction that you’ve left a comprehensive plan for those you leave behind – but it really exists for the benefit of your beneficiaries.
Why would I consider a Will incorporating Testamentary Trusts?
Primarily because they are incredibly beneficial for asset protection and, they also provide some pretty decent tax benefits that aren’t otherwise available on the receipt of an inheritance.
If you are leaving a portion of your estate to a beneficiary who ticks any of the below boxes, a Testamentary Trust will provide protection to their inheritance:
1) Someone in a high-risk occupation – i.e. doctors, lawyers, etc.
2) Someone who is an undischarged bankrupt.
3) Someone who owns their own business and could potentially be exposed if things go wrong therein.
4) Someone whose relationship is potentially on the rocks.
5) Someone who is unable to manage their inheritance themselves, including beneficiaries who might have an addiction or difficulty managing money appropriately.
You can include optional or compulsory Testamentary Trusts in your Will for beneficiaries, and each Trust can be bespoke to each beneficiaries circumstances. A compulsory Testamentary Trust might be beneficial for a beneficiary with a gambling addiction, so you can rest assured that what you leave isn’t easily accessible to that beneficiary.
Alternatively, an optional Testamentary Trust might be worthwhile if one of your beneficiaries is currently in a high-risk occupation but, you expect that, by the time your Will comes into effect, they might be retired by which time the risk has all but disappeared. Therefore, you leave them with the option to take their inheritance in the Testamentary Trust, or personally, depending on their circumstances at the relevant time.
You also have the opportunity to determine the Trustees and Appointors of the Testamentary Trust. The Trustee is the person or people responsible for the day to day running of the Trust. The Appointor is the person or people who can ‘hire and fire’ the Trustee (the ultimate controller).
By dictating the people who assume these roles in the running of the Trust, you choose who manages the Trust long term, so if you don’t believe your child will be able to manage it alone, or their circumstances warrant supervised control, you can facilitate this through the terms of your Will.
Practically speaking, here’s what the difference might look like:
- If you leave $500,000 to your child personally, it will be deposited into their personal bank account for them to deal with as they please – exposed if they get into financial difficulty, recoverable by creditors if they have mounting debts, available for seizure if they are bankrupt, falls into the matrimonial pool if they end up in family law proceedings; but
- If you leave $500,000 to a Testamentary Trust for that same child, the inheritance never goes into their personal bank account or name. It’s not like the above situation where they can access it as easy as an ATM. It is always an asset of their Trust and distributed at the discretion of the Trustees of the Trust – protected if they get into financial difficulty, protected if creditors come after them, protected if they are bankrupted, not drawn straight into the matrimonial pool if they are involved in family law proceedings.
When the purpose of a Testamentary Trust is properly understood and the Will is drafted to provide a balance of rigour and practicality in the establishment thereof, these nifty little Trusts can be incredibly useful for your beneficiaries.
But, I hear you ask, what about those tax benefits?
Lawyers aren’t allowed to provide tax advice, and for good reason – we are good with words, but we leave the numbers to the experts!
In a nutshell, however, Testamentary Trusts allow income earned to be distributed to minor beneficiaries (or for their benefit) at the adult tax-free threshold (which is approx. $18,200), as opposed to the tax-free threshold for a child (which is approx. $416).
Let’s play this out with an example! If mum and dad leave their estate to their only daughter in a Testamentary Trust, their estate passes into the Trust and can be distributed to the daughter (who would be the Primary Beneficiary) and her children. Say, she has three minor children, each attracting the adult tax-free threshold. The daughter can distribute $18,200 of trust income to each of her children each year, which will invariably bring down the income earned by the trust and significantly reduce potential tax payable.
Now, I know what you’re thinking – who, in their right mind, would give minor children $18,200 each per year? The catch is, the $18,200 doesn’t have to go into the hands of the minor children, it just needs to be applied for their benefit. $18,200 can disappear very quickly if she’s putting each of her children through private school, or they do sixteen different expensive extracurricular activities!
Overall, the net result for the daughter is that she can ‘stream’ $54,600 out of her Trust for the benefit of her children, and reduce tax payable – every, single year.
So, how do I know if I need a Will incorporating Testamentary Trusts?
It probably won’t be apparent to you on the face of it – you might have an inkling based on your level of wealth or family circumstances. But the best way to explore the options and implement a plan that ensures your estate passes where you want and on your terms is to seek comprehensive advice.
A Will incorporating Testamentary Trusts is a sophisticated document, tailored to your circumstances and providing a level of rigour that cannot be achieved any other way. It will provide you with a level of comfort but really, it’s a legacy you will leave that your beneficiaries will undoubtedly thank you for.
If you’re interested in learning how to plan your wealth before you retire, check out our Retirement Planning page for more information.
Any advice on this site is general nature only and has not been tailored to your personal objectives, financial situation and needs. Please seek personal advice prior to acting on this information. Any advice on this website has been prepared without taking account of your objectives, financial situation or needs. Because of that, before acting on the advice, you should consider its appropriateness to you, having regard to your objectives, financial situation or needs.
