A Testamentary Trust is a trust created by a Will. It is generally a discretionary trust, one where the Trustee has full discretion about who benefits, and to what extent, under the trust.

Testamentary Trust Lawyers NSW

A Testamentary Trust has two significant advantages for a will maker and the nominated beneficiaries:

  • Significant taxation advantages in terms of income splitting; and
  • Protection of the bequeathed assets from any financial hardship or other difficulties that the beneficiaries may suffer.

See also: Asset Protection

The main advantage of using a discretionary Testamentary Trust for bequeathed assets is that any income gains, capital gains and franked dividends can be distributed among all the family beneficiaries each year in the most tax-effective way.

The tax concessions do not apply solely to income and capital gains derived by the trust from inherited assets. They also apply to any income and capital gains derived from assets acquired by the reinvestment of moneys received from the original inherited assets.

There is no legal limit to how many Testamentary Trusts a will can establish. Ideally, a will would establish a separate Testamentary Trust for each beneficiary.

Why should I use a Testamentary Trust?

Creditor Protection

A Testamentary Trust can offer some protection from creditors of beneficiaries. For example, if one of your beneficiaries receives his/her inheritance in a Testamentary Trust and runs into debt because he/she fails to make monthly car loan payments, depending on how the trust is structured, the creditor who provided the loan to the beneficiary may not be able to access the inherited wealth.

Income Splitting

A Testamentary Trust will enable your beneficiary to distribute the income he/she receives from assets held in the trust among the other beneficiaries. As the class of general beneficiaries of the Testamentary Trust includes your beneficiary’s spouse and children, trust income can be streamed to children for things such as payment of school fees. Such income is not taxed in the minor beneficiary’s hands at the highest marginal tax rate as is the case where children receive income from a trust which is not a Testamentary Trust.

High Risk Beneficiaries

If structured correctly to the specific circumstances of a beneficiary, a Testamentary Trust may protect a high risk beneficiary from losing or dissipating the wealth and assets they inherits from you. Examples of a high risk beneficiary is someone who has money problems, is bankrupt or has issues associated with gambling, drugs, alcohol or who works in a high risk profession and who could be sued by a disgruntled customer/client.

Children with Special Needs

A properly drafted Testamentary Trust tailored to a child’s specific circumstances will provide you with a way of ensuring any child with disabilities or special needs are looked after.

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