A Testamentary Trust is a discretionary trust which is created in your Will.  A discretionary trust (when created during your lifetime is commonly called a family trust) is where a person or company (trustee) holds property, business or investments on trust for the benefit of a number of people and related parties (beneficiaries).  The trustee has the total discretion to distribute the income and capital of the trust to the beneficiaries.  Creating a Testamentary Trust in your Will is often a more effective alternative than making a direct gift to a person under a standard Will.

What are its advantages?

Protection from divorce or separation

If a beneficiary (say your child) separates and is  involved in matrimonial property proceedings, it is possible by using the Testamentary Trust to keep your child’s inheritance separate from his or her own assets, and therefore quarantine it from a claim by the separated spouse or de facto partner.  In this way, your estate is left to your direct descendants, rather than being divided between in-laws.

Protection from bankruptcy

If a beneficiary gets into financial difficulties,  even though he or she may be bankrupt, the gift given to them via the Testamentary Trust will be protected from that bankruptcy.  These days,  with more and more people involved in financial activities (such as giving guarantees for business, borrowing or investment etc) this may be an important protection for your surviving family.

Protection for a person suffering from an incapacity 

If a person develops some incapacity, such as an intellectual handicap, alcohol or drug dependency, or just may not be able to handle money, rather than give a gift directly to that person, you can have other people control it through a Testamentary Trust.

Exercising control of your estate 

Although a standard Testamentary Trust has total  flexibility so the trustee is able to invest in whatever property or assets they wish, and may draw on capital or income from time to time as they desire, you may wish to exercise some control over this.  So, with a Testamentary Trust, the capital of the gift may be held ultimately for the children of the beneficiary so that while that beneficiary is alive, he or she has access to income only.

Tax Minimisation 

A testamentary trust can provide taxation  advantages where there are minors who are beneficiaries under the trust, as children enjoy the normal personal tax-free threshold per annum. Therefore, in a situation of a surviving wife and say three children, rather than the wife alone paying tax on the income generated from the inherited property, she can lessen the “tax hit” by distributing to other family members who are lesser income earners.

What assets are included in the Testamentary Trust?

Only assets that are in the deceased person’s name at the time of his or her death are included in that trust.  Therefore, it’s important that insurance policies are the ownership of jointly owned properties is reviewed by a lawyer to ensure that they will form part of the trust. Sometimes it is preferable that superannuation money is received by surviving spouses or children, rather than being paid into a trust.  It is appropriate to have options in your Will to enable superannuation funds to be paid either to the trust or to individuals.

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What is a family discretionary trust?

A family trust is actually not a separate entity like a company.  A trust is more correctly a legal relationship between the trustee (which may be a person or a company), assets (the trust property) and other people (the beneficiaries).  A properly drafted trust deed provides flexibility in deciding
who benefits from the income the trust earns and from capital gains.

These days trusts are used for two main purposes – income tax minimisation and asset protection.

So what can be done to minimise your tax? 

Income tax minimisation is all about ensuring that the income of an entity is taxed at the lowest possible legal rate.  So, if you are earning an income and your spouse is not, a family trust opens the door to dividing the income, and therefore being taxed at overall lower rates between you.

While all of your tax issues should be referred to your accountant, an example of tax minimisation may be that if your business is conducted through a trust rather than via a company, then the trust may distribute its income to individuals (for example your spouse or partner) whose marginal rate may only be 15% as opposed to paying income tax at the company rate (if your business was owned by a company) of 30%.  In this way you can take advantage of your partner’s low marginal tax rate and tax-free threshold.

What about asset protection? 

A family discretionary trust puts a firewall between you and your hard earned assets, and the possibility of them deteriorating in any unforeseen legal action.  It is particularly useful if you have a high-risk business venture, and is an ideal option for entities from farmers to small business owners, professionals to self-funded retirees.

How can we help?

At Duffy Lawyers we pride ourselves on our holistic approach to client care.  Our clients value our good service, availability and down-to-earth practical advice.  We see you as someone with a complex array of needs and requirements, rather than a person who presents with just one legal issue. We will work with you and your accountant to decide if a trust structure is what’s best for you.  Items we address include:

• making sure it’s correctly set up from the start;
• making sure the trustees are aware of exactly what’s in the trust fund and of their responsibilities;
• what happens if there is a debt and so on.

What costs are involved?

There are some ongoing costs which vary in addition to the initial establishment costs and depending on the ultimate structure chosen. The ongoing costs will include annual account and record keeping fees as well as an annual fee payable to ASIC, if a company was established to be the trustee of the Trust.

A structure consisting of two entities – a corporate discretionary trust with a corporate trustee and a separate investment company – may provide the ideal structure for a small business that will also make some investments, but will obviously be
more costly to administer than a single entity.

The costs really need to be weighed up against the possible tax savings and asset protection that a trust may provide.

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