The saying goes that the first generation makes a fortune, the second generation spends it and the third generation blows it.
There are many ways that wealth can diminish over generations – especially if there is a spendthrift beneficiary, a divorce, an attack by creditors or simply poor tax planning.
Where these concerns exist, it may be worth considering whether a testamentary trust will assist your beneficiaries.
What is a testamentary trust Will?
Put simply, a testamentary trust Will is a Will which allows your beneficiaries to establish a trust to receive their inheritance.
The structure of the testamentary trust may take a number of forms including a fixed trust, a capital protected trust, a lineal descendent trust or a discretionary trust.
The main type of testamentary trust we see is a discretionary (family) trust.
For those familiar with a discretionary (family) trust – a testamentary discretionary trust works similar to this, with a few exceptions.
The testamentary trust will only come into existence once the Will-maker dies. At that point, depending on the terms of the trust, the beneficiary is generally entitled to establish the trust to receive their inheritance from the estate.
Advantages of a Testamentary (Discretionary) Trust for your Beneficiaries
If a beneficiary practices in a professional capacity, or operates their own business, then they may be at risk of litigation or being targeted by creditors.
A testamentary trust can provide such a beneficiary with significant asset protection.
Rather than receiving their inheritance in their own personal name, they will receive it in a testamentary trust. This allows them to keep their inheritance separate from their personal assets which may be targeted in litigation or by creditors.
Protection in the event of a matrimonial dispute
There is a common misunderstanding that if a beneficiary has received their inheritance in a testamentary trust then the assets of the testamentary trust will be protected no matter what in the event of a matrimonial dispute.
Where a beneficiary goes through a separation, the Family Court has broad powers when it comes to determining assets that form part of the ‘matrimonial pool’ and it can include trusts.
Whether the assets of the testamentary trust will be protected in the event of a matrimonial dispute will come down to the terms of the trust, who is in control of the trust, and who receives distributions from the trust.
Having said the above, a testamentary trust will provide your beneficiaries with the tools to protect their inheritance in the event of a matrimonial dispute.
Conversely, if the beneficiary receives their inheritance in their personal name, there is a strong possibility this will be considered property of the marriage, and form part of the matrimonial pool.
A testamentary trust can provide tax planning opportunities to a beneficiary, and their family.
Any distributions to a minor from a testamentary trust receives the benefit of the full income tax free threshold. Therefore, the trustee can make distributions from the testamentary trust to minor beneficiaries of up to around $20,000 tax free.
This is different to a trust created during someone’s lifetime where tax free distributions to a minor is limited to around $400.
There is no doubt that a testamentary trust Will provides significant benefits to your beneficiaries. However, before establishing a testamentary trust Will it is important to receive advice and understand the mechanics of the trust.
Please do not hesitate to contact us if you have any questions regarding testamentary trusts or any estate planning issues.