The answer to this depends on the likely value of your deceased estate and the number of primary beneficiaries who you would like to take a share in that estate.
If your beneficiary or each of your beneficiaries is likely to receive a sum of $500,000 or more then it is certainly worth considering preparing a will with testamentary trust. A testamentary trust will provide two significant advantages for each beneficiary in relation to your gift to that person:
- Asset protection; and
- Tax advantages.
The gift you leave to a beneficiary in a testamentary trust is protected from your beneficiary’s creditors. So, generally speaking, if your beneficiary finds herself or himself in debt the debtor may sue your beneficiary and recover the debt from your beneficiary’s personal assets, but not from the testamentary trust fund that you leave for that beneficiary under the terms of your will.
This protection can even apply in relation to a family law or de facto relationship property settlement. This means that your beneficiary’s interest in the testamentary trust fund is also better protected from the power of the Family Court to adjust the interests of separating couples who have property in either or both of their names. Generally, the Family Court may have regard to the existence of the testamentary trust fund as a resource for your beneficiary, but may determine not to adjust the interests in the trust or make any orders with respect to the money or property held in that trust.
With a Hansons Lawyers testamentary trust you will be able to appoint one or more primary beneficiaries each of whom will have control of their own testamentary trust. Each of those trusts (created by a single document under your will) will include further potential beneficiaries. There is a broad range of potential beneficiaries, but the most significant of them who feature most usually in the use and operation of a testamentary trust are the children of your primary beneficiary.
Is important to note that potential beneficiaries are only that, potential, and any distribution to those potential beneficiaries is entirely at the discretion of your primary beneficiary (eg. your spouse or child).
The availability of potential beneficiaries has important tax advantages. There may be a very substantial tax saving by distributing to a low/no-income potential beneficiary.
The point is about having the ability to distribute income of the trust to the best tax advantage.
The most common way a primary beneficiary will take advantage of this is by making a simple notional distribution of the income earned by the trust each year to the children of your primary beneficiary.
A testamentary trust is the only type of trust where such distributions to children may be made while taking advantage of the ordinary tax free threshold, which in 2017 is $18,200.
So, for example, imagine the trust earns $40,000 in a particular year. Without the benefit of a testamentary trust, if your primary beneficiary inherited absolutely under the terms of an ordinary will, then this income would simply be added to your primary beneficiary’s income for that year. So, if your primary beneficiary otherwise had a taxable income of $80,000, an ordinary inheritance might suddenly give them a taxable income of $120,000 and most of the benefit of that additional income each year would be lost to tax.
If on the other hand your primary beneficiary earns that income in the vehicle of a testamentary trust, then your beneficiary may distribute that income to, say, 2 children in equal shares of $20,000 and pay tax on only $1,800 for each child.
This represents savings of tens of thousands of dollars each year.