Creating a testamentary trust is an important aspect of estate planning. There are various benefits of using a testamentary trust for a trustee such as lowering the tax outgoing, protecting beneficiaries and your assets, as well as providing you with complete flexibility.

Through LawPath, you can get in touch with an Estate Planning Lawyer to help you understand what is involved in an estate plan and suggest the appropriate documentation for your situation.

If you would like more information on testamentary trusts, check out our guide – ‘What is a testamentary trust’.

Why use a Testamentary Trust?

A testamentary trust structure allows the benefit arising out of the assets owned by the trustee to pass to the beneficiary in the manner that he or she chooses to. This separation of control allows trustees to protect assets from the misuse of beneficiaries. For example: A parent may want proceeds to be transferred to a child when the child reaches a mature age.

The following are a list of the benefits of using a Testamentary Trust:

Flexibility

Testamentary trusts provide complete flexibility with distribution of income and assets. It also allows the trustee to invest in an area that he or she would like to. For example: A trustee may choose to contribute a small sum to a social cause out of his or her estate.

Protection of Beneficiaries

  • Vulnerable beneficiaries – To ensure that a child or disabled family member or an intellectually impaired child is looked after.
  • Spouses who remarry – In the case where you want to provide for your spouse but are worried that they will remarry and divert your family assets to the new family.
  • Beneficiaries receiving social security entitlements – A testamentary trust allows the money received from disability support or pension (usually one-time lump sum payments) to be distributed at regular intervals, so that a beneficiary continues to receive social security payments without the risk of losing entitlements.

Protection of Assets

  • Credit protection – If a beneficiary has a number of creditors and bankruptcy proceedings against them, a testamentary trust can ensure that trust assets will not be at the risk of being given away to creditors.
  • High risk beneficiaries – When a beneficiary is in a profession which is high risk, a testamentary trust will protect the inheritance.
  • Will challenges – If your beneficiaries receive your estate in a trust, it cannot be challenged in a will when they pass away as it is not a part of their estate.

Taxation Benefits

The main tax advantage of using a discretionary testamentary trust is that any income can be distributed amongst beneficiaries in the most tax efficient way possible:

  • Trust Income – If a beneficiary is not earning an income or is a child below the age of 18, distributing income to them will reduce the overall tax exposure.
  • Capital Gains – Tax on capital gains finally payable on selling assets can be significantly reduced when distributed to a beneficiary with a low personal marginal tax rate.
  • Superannuation and Insurance Proceeds – Flexibility can be retained at the point in time proceeds from superannuation and insurance are received so that it is distributed to reduce tax outgoings.
  • Dividend income – Similarly, credit from dividend income can be distributed at tax-efficient rates if certain conditions set out by Taxation Authorities are satisfied.

Final Thoughts

The benefits of using a testamentary trust are numerous and must be considered at the time of estate planning. LawPath can provide you with 3 fixed-price quotes from Estate Planning Lawyers most suited to your individual needs.

Contact a LawPath consultant on 1800LAWPATH to learn more about customising legal documents, obtaining a fixed-fee quote from our network of 600+ expert lawyers or to get answers to your legal questions.

Nishita John

Nishita is a paralegal at LawPath working in our content team, which works to provide free legal guides to enhance public access to legal resources. With an Investment Banking background and a keen interest in Corporate and Commercial Law, her research focuses on small and medium businesses, and how to simplify complex legal procedures