Testamentary Trusts have become, over recent years, popular as a structure used for estate planning purposes providing asset protection and tax benefits associated with these trusts.
What is a Testamentary Trust?
A Testamentary Trust is a Trust established under a Will, allowing the Trustee to distribute income and capital to a broad range of beneficiaries.
A Testamentary Trust only comes into existence once the Will maker has died.
It is possible for a Will to contain more than one Testamentary Trust, for example, separate Testamentary Trusts for each child of the Will maker.
Advantages of a Testamentary Trust
The tax advantages include income received by a child beneficiary that will be taxed at adult rates pursuant to section 102 AG (2) (d) (i) of the Income Tax Assessment Act 1936. It should be noted that contributing property to a Testamentary Trust, post establishment, that derives income, may result in the minor not receiving the tax concessions in relation to that income (sections 102 AG (3) and section 102 AG (4)). An additional benefit is the flexibility of distributing income and capital of the Testamentary Trust.
Testamentary Trusts also provides asset protection. Additionally, a Testamentary Trust protects such part of the estate that is placed in a Testamentary Trust, for example, beneficiaries with substance abuse issues.
Parties to a Testamentary Trust
The Trustee or Trustees being a person or persons or entity or entities controlling the Trust. Such Trustee or Trustees has or have powers, subject to the terms of the Trust, to decide what investments the Trust should have as well as determining what income and capital distributions are made to which beneficiaries in any one year.
Beneficiaries will normally include family members, related entities of the Will maker and charities. The beneficiaries do not have any proprietary right in the assets of the Trust, only a right to ensure that they are considered and the Trust is administered properly.
Normally provisions are included in the Testamentary Trust to allow a mechanism for removing the Trustee. Usually, the primary beneficiary of a Testamentary Trust is given the power to replace the Trustee of the Testamentary Trust and appoint a new Trustee. Careful consideration needs to be given to the appointment of a Trustee or Trustees of a Testamentary Trust. The terms of a Testamentary Trust may provide that:
1. The Trustee or Trustees may only exercise the power of appointment to appoint such other person as he, she or they chose to be an additional or replacement trustee, with the consent of the primary beneficiary of such Testamentary Trust;
2. Any Trustee who is also the primary beneficiary or residuary beneficiary and who, by reason of incapacity, bankruptcy or otherwise, is unable to act or continue to act as Trustee, shall not be appointed as Trustee and shall be deemed to have resigned as Trustee, as the case may be. The term “incapacity” may be defined to mean:
- Unsoundness of mind or lack of mental capacity;
- Ceasing to be a resident of Australia within the meaning of the Income Tax Assessment Act 1936, as amended.
For more information please contact Stephen Rockliff of Rockliffs Lawyers.