Testamentary Trust Wills

What type of Will do you need? Before deciding which type of Will suits your needs you should consider the following questions and the materials with this brochure.

  • Do you want your estate to be administered in a tax effective manner to minimise taxation on inheritance and maximise the benefits for beneficiaries?
  • Do you want to transfer your superannuation entitlements to your beneficiaries not only in a tax effective way but also to ensure that the right beneficiaries actually receive your superannuation death benefits?
  • Would you like to protect your beneficiaries inheritance if their marriage fails or they are sued or become bankrupt?
  • Would you like to protect your beneficiaries inheritance if they have a mental breakdown, cannot handle money or have a gambling or drug addiction?
  • Do you want to protect vulnerable beneficiaries, provide ongoing care for disabled beneficiaries and establish special disability trusts?

Do you anticipate that anyone may challenge your Will?

If you have any concerns about these issues please read the attached information which discusses Testamentary Trust Wills. It is unfortunately true that the two certainties in life are death and taxes. However, we can ensure that the financial assets we have built up over our life are transferred to our loved ones when we die.

What is a Testamentary Trust Will?

A Testamentary Trust is a trust created in your Will. It only comes into existence on your death and you can establish more than one testamentary trust on your death for the benefit of each of your beneficiaries.

Who controls my assets in a Testamentary Trust?

This is your decision as the trustee is the person or persons you name in your Will.

What decisions can the trustee of the Testamentary Trust make?

Again this is your decision. The powers you give the trustee are totally up to you. It is possible to give the trustee full discretion or no discretion as to who will receive the income and/or capital of the assets in the trust. It is also possible to ensure that the trustee only distributes capital and/or income from the trust when you want the capital and/or income distributed.

What happens in practice?

On your death the executor of your will has the responsibility to make an application for a Grant of Probate through the Supreme Court. Once a Grant of Probate is granted your executor will organise the payment of funeral expenses and debts. The assets which are left to beneficiaries direct are then transferred to those beneficiaries and the assets that are left on trust are transferred to the trustee of the testamentary trust to be administered in accordance with the trusts established in your Will. Once this takes place the role of your executor is finished.

Do Testamentary Trusts allow me to transfer assets to my beneficiaries to minimise Income and Capital Gains Tax?

The use of testamentary trusts in Wills can provide the opportunity to effectively split income between family members. The Income Tax Assessment Act allows the income beneficiary of a trust established in a trust to be treated like a normal taxpayer. The effect is that a child will have the same tax free threshold as adults.

Example 1
Fred died and left all his assets to his son Jack. Jack was the sole executor of his father’s Will. Fred’s assets are:

  • House - $500,000
  • Super - $150,000
  • Other - $50,000
  • Total - $700,000

Jack is working and is in the top marginal tax bracket (45%). Jack is married to Anne. They have three young children Jane, Simon and Peter and Anne is not working.

Options Available

  • If Jack invests the $700,000 in his own name (at 7% interest)
    Tax Payable - $22,050 plus Medicare Levy

  • If Jack invests the $700,000 as trustee of a testamentary trust and distributed the income equally to Anne and their children Jane, Simon and Peter
    Tax Payable - $NIL

Tax saving of $22,500 plus Medicare Levy EVERY YEAR

Example 2
Fred died and left all his assets to his son Jack. Jack was the sole executor of his father’s Will. Fred owned an investment property which carried an unrealised capital gain of $100,000.

Jack intended to sell the investment property. Jack is working and is in the top marginal tax bracket (45%).

Jack is married to Rebecca and they have two young children Sandy and Denise and Rebecca is not working.

When should Jack sell the investment property?

Options Available

  • If Jack sells the investment property as executor, pays the Capital Gains Tax and then distributes the proceeds of the sale to himself
    Tax Payable - $11,172

  • If Jack sold the investment property as a beneficiary
    Tax Payable - $23,500

  • If Jack sold as trustee of a testamentary trust and distributed the capital gain equally to Rebecca and Sandy and Denise
    Tax Payable - $4,735

Can I decide in my Testamentary Trust Will who receives my superannuation entitlements on my death?

Superannuation is usually your second largest asset after the family home. It cannot be dealt with in your Will.

If you cannot leave your superannuation to your beneficiaries in your Will then what are your options?

If the trustee of your superannuation fund allows you to make a Binding Death Benefit Nomination then you do have some control over who receives your superannuation benefits on your death. You can nominate who is to receive your superannuation, including your estate. The law limits who can be nominated. Binding Death Benefit Nominations are binding on the trustee of your superannuation fund and must be renewed every three years. If they are not renewed then they are not binding on the trustee. This can potentially create uncertainty especially when we often forget to renew our nominations of where we lack capacity in which case we do not have the legal capacity to renew our nominations.

However if the trustee of your superannuation fund does not accept Binding Death benefit Nominations then the payment of your superannuation benefits will be at the discretion of the trustee. This could take a long time to sort out.

If you have a Self Managed Superannuation Fund then it is possible to make indefinite nominations that are binding on the trustee of your fund on your death. They do not need to be renewed and provide the greatest certainty when dealing with your superannuation entitlements.

It all depends on your specific circumstances and what nominations you have made as to whether your Will deals with your superannuation entitlements.

Can I do anything to minimise tax payable on my superannuation entitlements on my death?

If you die with assets in superannuation then potentially you estate will have to pay superannuation death benefits taxes. It all depends on whether you have dependants at the time of your death. Your partner is a dependant as are any of your children who are under 18 years of age. There are others that can be dependant in certain circumstances. However your children who do not live at home and are not financially dependant on you are not dependants. It makes a big difference to how your superannuation benefits are taken on your death.

Example:
Jane has two children Michael and Clare. Michael lives interstate with his partner and family. Clare lives at home with Jane and is at university. Jane’s assets include her home valued at $600,000 and $600,000 in superannuation. Jane wants to leave her superannuation benefits to be shared equally between her two children. If Jane has $600,000 in superannuation then Clare as a dependant will receive $300,000 tax free on Jane’s death as she is dependant on her mother. However as Michael is not dependant on his mother his share of the superannuation will be taxed. In his case the superannuation death benefit tax could be as high as $49,500.

However if Jane had an adjustment clause in her testamentary trust will then the home could be transferred to Michael tax free and the superannuation paid to Clare tax free. In this example there is a tax saving of potentially $49,500.

TIP - If you hold superannuation assets and have children who are potentially not dependant on you then you should immediately seek financial advice and review your Will and superannuation death benefit nominations.

What types of trusts can be created in a Testamentary trust Will?

The types of trusts that can be created are largely limited by your imagination. Examples include Life Interests, Rights of Occupation, Education Trusts, Superannuation Death Benefit Trusts, Special Disability Trusts, Capital Protected Trusts, Fixed Trusts, Beneficiary Controlled Trusts, Staggered Time Release Trusts, All Needs Protective Trusts, Inactive Trusts and non Beneficiary Controlled Trusts

Can I protect my beneficiaries inheritance if they become bankrupt?

People in certain professions such as business owners, self employed people, lawyers, doctors, accountants, engineers and company directors would prefer not to receive an inheritance in their name. One of the reasons is that if they are sued that inheritance could end up with their creditors.

Example:
Jack owned a successful business. Jack recently received an inheritance of $500,000 for his late aunt. Unfortunately an accident has occurred at work and from one of Jack’s employees has been badly injured. Further for some reason Jack’s insurer has denied liability and Jack may have to pay the whole claim from his own assets. If that happens then Jack will lose his inheritance. If Jack’s late aunt had left the inheritance to Jack in a testamentary trust then the inheritance would be safe.

TIP - For asset protection reasons it would be in Jack’s interests that he receive his inheritance in a testamentary trust. Perhaps he should discuss these issues with his parents or others who propose to leave him an inheritance.

Can I protect my beneficiaries inheritance if their marriage fails?

In many cases people are concerned that whatever they leave their children will eventually go to their son-in-law or daughter-in-law if their child’s marriage fails. If your children receive a direct inheritance from you then that inheritance will form part of their assets and will therefore be part of the assets available for distribution by the Family Court.

On the other hand if your children receive their inheritance in a Testamentary Trust then, if the Will is properly drafted, the inheritance may not form part of the assets of the marriage and would not form part of the assets available for distribution by the Family Court.

Example:
David left $1,000,000 to his son Bill in a Testamentary Trust. Bill and his wife Anne separated some time after David’s death and their total assets were the family home worth $500,000 after allowing for the mortgage debt. The Family Court took into account David’s inheritance however as it was not property within the meaning of the Family Law Act it was not available for distribution to Anne. If it was then possibly Anne would have received $750,000 being half of the value of all the assets. As the Court found that the $1,000,000 inheritance was not property the Court only had the power to give Anne a larger percentage of the assets of the marriage namely $500,000. The Family Court did take into account the inheritance and gave Anne more than half of the assets of the marriage however the amount was less than the assets of the marriage namely $500,000. The effect of the Testamentary Trust was that Bill received his inheritance of $1,000,000 and part of the
assets of the marriage with Anne receiving the balance.

TIP - Everyone who is concerned about the stability of their marriage should think about any inheritance they may receive. Perhaps they should discuss these issues with their parents or others that propose to leave them an inheritance.

Who controls your Family Company, Family Trust or Self Managed Superannuation Fund on your death?

Typically professionals such as lawyers, doctors, accountants, company directors, engineers and people in businesses are advised by their professional advisors to place assets in Family Companies, Family Trusts and Self Managed Superannuation Funds with a corporate trustee. These structures offer both asset protection and tax savings.

However on your death your Family Company, Family Trust or the corporate trustee of your Self Managed Superannuation does not die.

Who therefore controls these entitles on your death?

Does the Family Trust Deed, Company Constitution or trust deed for your Self Managed Superannuation Fund pass control to the people you want to control these assets on your death? It is therefore critical that either your Will or a separate document is prepared to ensure that your assets held in these entities are controlled by the people you wish to benefit from your estate.

Example
Steve is a successful businessman. The assets of the business are held in a family trust with a corporate trustee. Steve has effective control because he controls the trust (he is the Appointor). The trust deed says that on Steve’s death the executor of his estate will be the new controller of the assets held in the trust. Steve’s two sons Bruce and Peter work in the business and expect to run the business when Steve retires. Steve has appointed Bruce as the executor of his will. In tragic circumstances Steve and his son Bruce are killed in a car accident. The person that now controls the trust is the executor of Bruce’s will which is his wife. Now the business is controlled by Peter’s deceased brother’s wife. She now has the power to run the business. She can appoint who she likes as the trustee of the Family Trust and depending on who are the beneficiaries of the family trust could either pay all of the profits of the business to herself or even sell the business and keep the proceeds.

TIP - Review who controls your Family Company, Family Trust or Self Managed Superannuation Fund if you are incapacitated or die.

The Next Step

Preparing a Testamentary Trust Will or reviewing your existing Testamentary Trust Will may involve:

  • reviewing the method of holding assets - possible conversions from jointownership to sole ownership;
  • reviewing superannuation nominations;
  • reviewing life insurance policy ownership;
  • considering Department of Social Security entitlements;
  • considering potential capital gains tax liabilities;
  • considering the financial and personal position of proposed beneficiaries.

Failure to undertake this analysis may result in severe unintended consequences if your Will is prepared where you believe the Will will deal with all assets including non-Will assets.

Summary

Regular review of your Will and a close association with your financial advisor is essential to ensure that your Will remains appropriate in an environment of changing laws and personal circumstances.

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