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What is a Testamentary Trust and their Benefits?

The definition of a testator is a person who has written and executed a last will and testament that is in effect at the time of his/her death. It is any “person who makes a will.”

A testamentary trust is a trust which arises upon the death of the testator, and which is specified in his or her will.

Testamentary Trusts are used as a part of Estate Planning and can have the following benefits:

  1. Protecting your wealth from unjust claims your beneficiaries do not receive the assets directly but rather an entitlement in a trust. If your beneficiaries are experiencing relationship troubles or financial difficulty a trust can provide a higher level of protection from claims.
  1. Family Protection for your assets
    1. Rather than giving your assets to your spouse, the assets go to a trust.
    2. The trust arrangements provides protection for your children or grandchildren should your spouse remarry or have other children.

3. Letting your Children mature

  1. Everyone knows giving your children a significant money before they mature is not a good idea.  However, once children reach 18 is it difficult to stop them getting their hands on the assets.
  2. A testamentary trust can provide a high level of control and certainty as to when your children gain access to particular assets and for what purpose.
  3. Staggering when your children receive assets gives them a “second chance” if they make financial mistakes earlier in life.  It protects their inheritance.

4. Income flexibility spread the burden of tax

  1. The trustee chooses how to distribute that income from year to year. This enables the trustee to take advantage of the lower marginal rates of tax of one or more potential beneficiaries.

5. Marginal rates of tax for kids turn kids into adults for tax purposes

  1. Income distributed to children under 18 from an ordinary trust is subject to what is termed the “minors tax”.  This tax applies at the flat rate of 47%, i.e. the child does not get the benefit of the tax-free threshold and the graduated marginal rates of tax.
  2. However, children under 18 do qualify for these tax concessions on income that they receive from a testamentary trust and a large potential saving on tax.

6. Capital gains tax and stamp duty flexibility

  1. When you die and an asset passes to directly to one of your beneficiaries, a transfer of all or part of that asset to another person will trigger CGT and stamp duty for that beneficiary.
  2. However a testamentary trust can be very flexible in how assets and transferred and this can greatly reduce the cost of restructuring entitlements under an Estate.
  3. 7. Reduced likelihood of claims against the Estate

When your assets are given “outright” to particular beneficiaries, it is relatively easy for a disgruntled beneficiary to prove they have not been adequately provided for.

However, a testamentary trust does not have a single beneficiary but rather a range of “potential beneficiaries” which can be structured to include a potentially disgruntled beneficiary.  It then becomes more difficult for such a disgruntled beneficiary to bring a claim until the trust has been fully administered.

Testamentary Trust should be used when the assets in your estate are greater than $200,000.

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