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The principal advantages of incorporating discretionary testamentary trusts in Wills
Trust income can be distributed to children under the age of 18 is taxed at their own marginal tax rates. Accordingly, there will be a tax-free threshold each year for each child.
The current tax-free threshold is $18,200.00 (which will increase depending upon low income rebates) which is significantly higher than the tax free threshold where distributions are made to children under family trust deeds. Where there are several children the tax relief can be very significant, particularly where there are a number of years until the children attain the age of 18. Income can also be streamed to low income adults to reduce overall taxation exposure.
Capital Gains Tax
Capital gains can be “streamed” to one or more beneficiaries who are able to take best advantage of the averaging rule or CGT losses. Accordingly, the tax on capital gains ultimately payable on realised assets can be considerably reduced where one or more of the designated beneficiaries has a low income in the year of distribution.
Under a normal Will, if a beneficiary is experiencing solvency difficulties or is already bankrupt at the time of a distribution, it is likely the gift will end up in the hands of creditors rather than for the intended benefit of the beneficiary. This need not be the case where a testamentary trust is used, as the beneficiary has no actual entitlement to capital or income until the trustee determines. Accordingly, assets can be retained within the family, free of creditor’s claims.
Family Law considerations
A parent may wish to minimise the chances of a child’s spouse/partner making a claim against an inheritance in the event of marriage/ de facto relationship breakdown. If testamentary trusts are used, an inheritance does not form part of the child’s ‘matrimonial property’ which is to be divided upon a relationship breakdown. The Family Court often treats testamentary trust assets as a resource available to the spouse rather than matrimonial property, although the Court does have the power to treat trust assets as matrimonial property.
In the event that a beneficiary is temporarily incapacitated, testamentary trusts will enable the assets to be managed by the family or professionals for the benefit of the beneficiary rather than having a portion of the estate controlled by an external agency.
Superannuation and Insurance Proceeds
Where testamentary trusts are used, the individual or his estate can be nominated as the beneficiary of superannuation benefits or insurance proceeds. In this way flexibility can be retained and the level of distribution to respective dependants, depending on the circumstances prevailing at the relevant time, can maximise the preferential tax status of the proceeds.
Testamentary trusts generally provide complete flexibility both as to the nature of the investments of the trust and as to the distribution of income and assets of the trust. Trusts can be validly created for up to 80 years and, accordingly, can benefit two or three generations. Alternatively, the trusts can be dissolved at any time (longer in South Australia) and distributions made to the desired beneficiaries.
The information contained in this fact sheet is general in nature and should not be relied upon as legal advice. Legal advice should be sought for specific matters. If you have any questions please phone 1800 555 777 and speak to one of our specialists.