Testamentary Trust

Testamentary Trust NSW

The Testamentary Trust Advantages

There are numerous Testamentary Trust tax benefits that may or may not be applicable to your circumstances, and most importantly, those of your intended beneficiaries. 

At Falzon Legal, our expert team will compassionately explain whether a Testamentary Trust is suitable — and then build a powerful and reassuring framework that meets your wishes and intentions.

Although the advantages differ from person to person, the most common upsides include:

Flexibility

As Testamentary Trusts are allowed to cover a span of 80 years — it’s not just one generation that may benefit from your estate. For example, your children, grandchildren, and potential grandchildren can enjoy an inheritance long after your passing.

Furthermore, inherent flexibility can permit the Trustees to decide when, and to whom, to distribute assets — to deliver the most advantageous position to the beneficiaries. This can take into account taxation factors, health, special requirements, or marriage circumstances.

Bear in mind that your appointed Trustees can only transfer assets to your nominated beneficiaries — including those who are yet unborn.

Spouse Remarriage

Should you pass on leaving your spouse behind, naturally you want them to be happy. And, as tough as it may be to accept, this may involve remarriage or a new de-facto relationship.

If you’re concerned that your husband or wife’s future partner may squander your legacy, inherit it if your spouse dies, divert it to their own family, or only marry for financial gain — you can safeguard it with a Testamentary Trust.

By holding your estate in Trust, and only distributing to nominated beneficiaries, you can determine exactly who receives your legacy. For example, shielding certain funds for the benefit of your grandchildren — not touchable by your spouse’s new family.

Children Divorcing

Since your assets are held in Trust, they are not in the ownership of a specific individual — until such time that they are distributed. Therefore, in the event of divorce, the Family Court cannot create an order to access funds and property. Not only does this deliver peace of mind to you, but also significant reassurance and protection to your children.

That said, it’s possible that a Trust may be considered an advantageous Financial Resource by the Court — which could possibly be taken into account during any property settlement.

Claims From Creditors

With a standard Will, should a beneficiary have solvency problems and be subject to claims from creditors for repayment — they may lose all their inheritance to satisfy these existing liabilities.

However, a Testamentary Trust can safeguard their share from a third party making a legal claim on their assets.

Since your estate is held by the Trust on behalf of all beneficiaries — not one single person — the funds are protected from creditor action.

Acting in the Best Interests of Beneficiaries

Providing for Education

A Testamentary Trust can ensure all or part of your estate is set aside for particular uses or scenarios — one of the most popular of which is for education.

For example, you may wish that your funds are used for a grandchild’s education — such as boarding school costs, private tuition, or university fees. This can prevent others from utilising bequeathed assets, however well-intentioned, for purposes that don’t match your intentions.

Furthermore, providing for your grandchildren or dependents in this manner can often provide a more tax-effective method than simply leaving funds to be distributed upon your passing.

Tax Efficiencies

Looking at how to reduce Capital Gains Tax on property in Australia? Use a Testamentary Trust!

As the Trust has the inherent versatility to move assets that are liable to CGT to a beneficiary with a lower income — this can possibly eliminate or reduce the tax due. Furthermore, any assets moving into a Trust do not automatically initiate a capital gains liability — permitting beneficiaries to defer it to a later date.

For Income Tax, amounts due are paid at the marginal rate for any Trust income — the liability falls on the beneficiary receiving the funds. If a beneficiary has children under 18 who are also eligible beneficiaries, they can receive this income — with full allowance of the adult tax-free threshold.

Bear in mind that all tax efficiencies of a Testamentary Trust are enjoyed by your beneficiaries, you personally gain no upsides — apart from the satisfaction you’re helping loved ones financially in the most advantageous manner.

At all times, Falzon Legal will communicate clearly, efficiently, and promptly with your existing financial planner or accountant. As we cannot provide investment or taxation advice — this reassuring symbiosis ensures you act both legally and financially responsibly.

And, if you don’t currently have a financial professional, we can recommend a responsible practitioner from our trusted network.

The Testamentary Trust Disadvantages

Although a Testamentary Trust can offer a multitude of benefits for your estate inheritors — there are a few possible downsides.

Working together, we will look at the position of your estate — and your intended beneficiaries — and advise of any drawbacks to creating a Trust.

Depending on your circumstances, these can include:

Cost of Administration

The actual costs depend on numerous factors — including the type of Trust, the number of trustees and beneficiaries, the value of your estate, and the complexity of your interests. 

As specialist Estate and Will planning lawyers — Falzon Legal will ensure your Trust is professionally built in line with your intentions, and at the most cost-effective price.

You Receive No Immediate Benefit

Unlike other Estate Planning options — such as Enduring Guardianship and Care Directives — a Testamentary Trust is established for the advantage of your beneficiaries, not yourself.

However, your Will is your legacy — in all senses of the word.

It’s your consideration and kindness being passed onto others — and a Testamentary Trust can elevate your estate’s security, efficiency, and net value for your loved ones.

Testamentary Trust Cost

The actual costs depend on numerous factors — including the type of Trust, the number of trustees and beneficiaries, the value of your estate, and the complexity of your interests. 

As specialist Estate and Will planning lawyers — Falzon Legal will ensure your Trust is professionally built in line with your intentions, and at the most cost-effective price.

Tax Efficiency Guarantees

Currently, a Testamentary Trust can deliver attractive tax efficiencies for both CGT and Income Tax.

However, it cannot be guaranteed that, should legislation change, these benefits will remain for the duration of the Trusts’ life.

Succession, Contests, and Challenges

Although you nominate your beneficiaries, in most cases, it will be the Trustee or Trustees who determine who receives assets and funds, at what time, and how much they enjoy — not you.

Therefore, it’s important to discuss with your potential Trustees how you wish your Testamentary Trust to be handled. Furthermore, in the case of a sole Trustee, you need to declare who will take on this role should they also become deceased.

Related to the above, if a nominated beneficiary feels that their access to Trust income is blocked or insufficient — they may challenge the Will.

Types of Testamentary Trusts

Generally speaking, there are two main forms of Testamentary Trust — Separate (Single) Trusts and Family Trusts.

Separate Trust

You can have individual Trusts for each of your beneficiaries — allowing for more focused attention on your inheritor’s needs.

This may be advantageous if your potential beneficiaries have specific requirements or circumstances. For example, you could create one Trust to address the educational future of a grandchild, and another to manage an insolvent relation’s inheritance.

Family Trust

A Family Trust places all the estate into a single pot, which is then distributed to the beneficiaries. This can be a proactive measure to ensure financial efficiency — such as minimising capital gains tax on inherited property in Australia, as explained above.

1. Decide What Assets the Trust Will Hold

When constructing your Testamentary Trust, you decide what elements of your estate it will contain. This can be everything you own, or just specific property, shares, or financial sums.

2. Nominate a Trustee

The next step is to select one or more persons to manage your Trust when you pass on. 

This should be someone who:

• You hold in good standing.
• Are honest and reliable.
• Willing and able to attend to the Trust for the long term.
• Understand and respect your intentions for the Trust.
• Will act in the beneficiaries’ best interests.

Often, people elect their spouse or close family member to be responsible for the Trust. However, where the Trustee is also a beneficiary, this can create some issues — it’s important you speak to Falzon Legal to discuss this matter.

3. Decide on Beneficiaries

You can name anyone as a beneficiary —spouse, family member, friend, or an organisation. If you’re thinking about nominating a charity — speak to Falzon Legal about Charitable Trusts. 

Remember, a Trust can last up to 80 years — so, it’s worthwhile considering future beneficiaries who will still be around after the primary beneficiaries are deceased.

4. Consider the Format of Your Trust

Testamentary Trusts permit you to declare what part of your estate beneficiaries may receive — and when.

For example, you can prevent younger inheritors from accessing any funds until they reach the age of 18 — while allowing a Trustee to release cash before then to pay for education, etc.

5. Sign Your Will

A Testamentary Trust only becomes valid once your Last Will and Testament is signed and witnessed.

Once finalised, and barring any future amendments, this is all that needs to be completed during your lifetime.

6. When You Pass On

After you die, the responsibility initially falls upon the Executor. Once Probate is achieved, they must:

• Inform the beneficiaries that they are in the Will under a Testamentary Trust.
• Inform the Trustee.
• Employ an accountant.
• Apply for a TFN (Tax File Number).
• With assistance from the accountant, transfer the relevant estate to the Trust.

Creating a Testamentary Trust is not something you can — or should — do yourself. It’s crucial to have the expert knowledge of Estate Planning specialists to ensure the Trust is legally binding.

Falzon Legal — Parramatta’s Expert in Testamentary Trusts

Amiable, considerate, and relentlessly professional — Falzon Legal is Sydney’s specialist Testamentary Trust Lawyers.

We understand that attending to complex, post-death matters can be emotionally stressful and challenging. However, we will professionally navigate you through Testamentary Trusts — explaining the benefits and disadvantages, how it works as a part of overall Estate Planning, and whether it’s suitable for your circumstances.