WHAT ARE THE BENEFITS OF A TESTAMENTARY TRUST?
(a) Taxation
Trusts pay no income tax provided 100% of their “profit” is distributed to beneficiaries each year.
Under current Taxation Laws any income distributed to beneficiaries who are under 18 years under a Trust set up by a Will (Testamentary Trust) may take full advantage of the marginal tax scales (if they are not in receipt of any other income) ie they pay no tax on the first $6,000.00 and progressively increase tax rates until they pay the highest marginal rate of 45 cents in the dollar. This differs from a Discretionary Trust set up normally where a child beneficiary can only receive approximately $500.00 tax free before being taxed at the highest marginal rate of 45 cents.
Consequently, a beneficiary who receives a bequest under a Will to themselves as trustee for a Testamentary Trust is able to use the inheritance more tax effectively than if it was inherited personally. It is conceivable that a beneficiary will already have a fairly high marginal tax rate and receipt of more assets through an estate will simply mean that all income of those new assets is taxed at the highest marginal rate. Inheriting through a Testamentary Trust enables the beneficiary to distribute the benefit between his/her spouse, children and grandchildren and reduces the incidence of taxation accordingly. It is possible therefore to put a maximum on the tax paid at the company tax rates! (30%)
(b) Asset Protection
Any assets inherited through a Testamentary Trust are not available to the creditors of the beneficiaries of the Trust unless and until any of the assets or benefit is actually vested upon them individually pursuant to the terms of the Testamentary Trust. Consequently, it is possible to inherit a considerable amount of assets which are not then exposed to existing financial pressures the beneficiary may face and in fact if the beneficiary were to go bankrupt the assets inherited would not be available to creditors in the bankruptcy. Generally, assets inherited without the benefit of the Testamentary Trust will be available to the beneficiaries’ creditors.
Similarly in the event that a spouse of a primary beneficiary who was trustee of a Discretionary Trust was to divorce then the assets held in the Testamentary Trust are not assets which can be accessed by the spouse in the divorce (although the existence of the potential benefit of those assets may affect the balance of distribution of assets on the property settlement)
GENERAL
Testamentary Trusts are not new and have been a feature of Estate Planning for many years. What is new is the realisation that the use of a Testamentary Trust can benefit a wide variety of people whereas previously they were only seen as being beneficial to high net worth individuals.
OTHER ESTATE PLANNING CONSIDERATIONS
Discretionary Family Trusts
A Discretionary or Family Trust is often used by people to hold their investments or business assets during their lifetimes. The major feature of a Discretionary Trust is that the asset is held by a Trustee who distributes the income produced by the assets annually in accordance with Family and Taxation consideration and who may at some time distribute the assets of the Trust to various beneficiaries in the Trustees discretion.
Because the assets in the Trust are not owned by the Trustee nor the Directors or Shareholders of a Trustee they are not assets which can be dealt with by a Will. All that can be done in a Will with respect to these Trusts is that the people holding the shares in the Trustee Company or the person who has the power to change the Trustee under the Trust Deed can be appointed. What you are effectively doing is nominating person or persons who have the power to control the Trustee who determines who benefits from the assets held in the Discretionary Trust. Obviously the appointment of this person or persons is vital as it is they who will have absolute say on the distribution of the wealth that is held in those Trusts. The person or persons should therefore be highly trusted and should be well instructed by the Testator as to how the discretion should be exercised.
Superannuation Funds
Many people now have self managed Super Funds of which they are personally trustees. Once more the wealth contained in these Super Funds is not an asset that can be dealt with by Will, however the power to control the distribution of assets out of the Super Fund lies with the Trustees and accordingly, it is the deceased's power to appoint new Trustees which is the power that is being dealt with in the Will. Once more the persons appointed should be chosen very carefully as they will have a very powerful discretion as to whom will benefit from the Superannuation Fund in the event of a death.
A Will should contain a provision which sets up a “Superannuation Proceeds Trust”. This will allow maximum untaxed benefits to be received by your estate and continued in a more tax sensitive environment rather than the super proceeds going absolutely to a beneficiary who may be on the maximum tax rate already.
Family Companies
When dealing with specific assets under a Will a Testator who has Family Companies or Family Trusts must be aware that there may as a result of movement of moneys between the company or Trust and themselves be in a situation where those companies or trusts owe them money or indeed they owe those companies or trusts money. These debts are treated similar to debts to outside parties and must be taken into account when dealing with specific assets under a Will.
Capital Gains Tax
A bequest of any specific asset is always dangerous as those assets may not exist at the date of death in which case the beneficiary will receive nothing unless the Will is changed. A bequest of the specific asset may mean that the recipient inherits Capital Gains Tax Liability to which the beneficiary will not be exposed until and if they sell that asset. Accordingly, a bequest of 2 identical assets to 2 different people may seem to be equal in value whereas one may have a higher liability to potential Capital Gains Tax then the other.
The rate of tax payable on disposal of an inherited asset is different to an individual and/or a Trust. A Will should provide for an option as to whether any particular asset should be inherited personally or through a Testamentary Discretionary Trust.
Conclusion
Estate planning is increasingly becoming more and more sophisticated and requires the assistance of a trained professional. If you have any questions in relation to your estate or require further explanation, please do not hesitate to contact the commercial team at MDRN.
