31 Mar Testamentary Trusts: are you thinking ahead for your family?
Every parent should be reading this FULL STOP!
This month we spoke to Tara Lucke who is a Principal from Nexus Law Group and she shares with us the importance of having the provision for a Testamentary Trust should the unthinkable happen.
This is what she had to say:
Testamentary trusts are one of my absolutely favourite estate planning tools. You’d be crazy not to use one
I like to think of them as the superhero of estate planning because they will save your family tax after you die, save your inheritance from divorce and bankruptcy risks and save young children from wasting their inheritance.
What’s not to love?
Here’s the low down of what you need to know about testamentary trusts:
- Testamentary trusts should save your family tax after you die
- Testamentary trusts should protect your inheritance from divorce and bankruptcy risks
- Testamentary trusts are not just for complex situations or the super rich
- You only get one chance to access the fantastic estate planning benefits of a testamentary trust – it MUST be in your will when you die
- Testamentary trusts are not administratively burdensome – any extra compliance should be far outweighed by the tax savings
- Testamentary trusts only start working if you die – the benefits don’t start until you die but neither do the (minor) compliance requirements
- When in doubt, use a testamentary trust
GIVE IT TO ME STRAIGHT… WHAT IS A TESTAMENTARY TRUST?
The phrases ‘testamentary trust’, ‘testamentary discretionary trust’, TT, TDT…. are all just ‘lawyer speak’ for a trust set up in a will that starts when the willmaker dies. It sounds kind of complicated, but they are essentially the same as a family trust (more technically known as a discretionary trust). The only real difference is a testamentary trust is established by a person’s will and remains dormant, ready to start only when a person dies.
HOW DOES THE TESTAMENTARY TRUST WORK?
Trusts work by separating control of the assets held in the trust
An effective testamentary trust should have many people who can potentially benefit from the assets in the trust (the technical term for these people are Beneficiaries) and each beneficiary’s entitlement should be at the complete discretion of the Trustee.
This discretionary nature of the trust is what makes the trust so powerful for asset protection. Because none of the beneficiaries
A trustee can also be one of the beneficiaries of the trust, and if that is the case, then the trust assets will ‘look and feel’ more like that person’s assets because they are in control and can choose themselves or their family members to benefit from the trust. If you are simply a beneficiary without being a trustee, then your entitlements in the trust are at the trustee’s behest.
Testamentary trusts offer fantastic tax flexibility. In fact, this is the only environment where you can get such great tax treatment, and it’s only because someone had to die for the trust to start (currently, the government does not recognise dying as a tax avoidance strategy… at least for now!).
In essence, trusts are ‘flow through’ vehicles for tax purposes, which means the income earned each year from investing the trust assets always
And testamentary trusts offer an additional benefit which is not available to any other type of trust – beneficiaries under 18 are treated like adults for tax purposes which means they can receive about $22,000 tax free each year (and no, you cannot get these tax free amounts now; unfortunately you do have to die before these tax savings start!).
If you die leaving a spouse and 3 minor children, then roughly the first $66,000 of income earned from investing the inheritance through trust could be
This article was produced with the assistance from Tara Lucke from Tara Lucke Legal click here if you would like to get in touch with her.
If you would like to know more, talk to Michael Sik at FinPeak Advisers on 0404 446 766 or 02 8003 6865.
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