Testamentary Trusts are discretionary or fixed trusts that are established by Will. They only take effect upon death and can be extremely beneficial in providing estate flexibility and financial protection for beneficiaries.
- Protection of Estate Assets
In many situations there may be a potential loss of estate assets if given immediately to a beneficiary - for example:
- If the beneficiary is in debt or bankrupt, a direct bequest may go to the beneficiary's creditors;
- If the beneficiary or the beneficiary's spouse is likely to dissipate the bequest, then a direct bequest may be inappropriate;
- If the beneficiary may be subject to a property claim under the Family Law Act, the bequest may pass through a Family Court Order to the beneficiary's spouse.
- Income Tax Planning
Income generated through a Testamentary Trust which is then paid to a child under the age of eighteen is taxed at adult rates and not the penalty rates that apply to all other unearned income paid to minors. In practical terms, what this means is that under a Testamentary Trust, income can be split between beneficiaries including children under 18, without a tax penalty. These tax savings can amount to many thousands of dollars over the duration of the trust and can mean, for example, that where enough beneficiaries exist, sometimes no tax at all need be paid.
- Creditor Protection
Assets left to a beneficiary under a discretionary Testamentary Trust cannot be claimed by creditors of that beneficiary. They are quarantined in the trust and can only be accessed by creditors if they are distributed to that beneficiary.
- Family Law Property Protection
Assets left under a discretionary Testamentary Trust, that is, a trust where the trustee is given the discretion as to how to distribute either the income and/or the capital of the trust between the nominated potential beneficiaries, can, in some cases, be quarantined from Orders of the Family Court where one of the beneficiaries is involved in a Family Court dispute. This is particularly important if a spouse remarries or if a child has an uncertain marriage. Using a Testamentary Trust can ensure that your estate will not automatically form a part of the asset pool that would be subject to division by the Family Court in a divorce settlement.
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