A testamentary trust, also known as a discretionary family trust, is a trust set up in your will. There are often some great benefits to establishing a testamentary trust, with most of the benefit arising from the trust owning the assets, not you.
Best-case Scenarios:
Marriage breakdown
Marriages end, but if there is a trust in place, this very rarely ends up in the Family Court. What may happen is the trust is – not wrongly – considered a ‘financial resource’, with some relevance as to the outcome of a settlement, however this is a very different scenario to a Family Court battle.
When someone involved goes bankrupt
For many, bankruptcy is a disappointing fact of life – things go wrong and sometimes you have to call it a day. Having a trust in place means that an inheritance is protected from bankruptcy creditors, so if you are gone and your spouse ends up bankrupt, at least the inheritance is covered and they don’t lose everything. If you simply have a Will instructing the passing on money or assets, creditors can often get hold of this to pay the outstanding bill, or part thereof, which can be devastating.
People who aren’t capable of, or partial to, managing money properly
Not everyone has the ability to manage money with any sense, and this may include a person with a disability or perhaps someone afflicted with drug, shopping or other costly addictions. Setting up a trust for these people means you can provide for their needs as required without loading their bank account with cash or putting disposable assets into their name.
You also don’t want any inheritance to interfere with any pensions a person may have a right to. Testamentary trusts are excellent tools in this context.
Taking advantage of tax treatment, especially for minors
There are some great tax savings provided through trusts, with an example of this being a child under 18 receiving income from a testamentary trust getting taxed as an adult – and benefiting from the $18,200 tax-free threshold. This increases to $20,542 if the low-income tax offset is applicable and marginal tax rates apply to adults.
If the child was taxed as a minor, they would only get $416 tax free, and the tax rate after this would be different to an adults, and much less beneficial.
Testamentary trusts can be contested
Although testamentary trusts are excellent choices for many families, they can still be contested by any eligible group or person using a Family Provision. Specific people – a spouse, children and possibly some other dependants – can raise issues and challenge the trust or will. This is normal, however, and not that common as trusts generally cover most bets.
How does it work?
To set up a testamentary trust you need to sit down with a lawyer and work out what you want to happen when you die, and a plan will be drafted up.
Read The benefits of a testamentary trust 1
Write your own story. Call Vanessa Ash and Associates today.