Will or Trust Estate Planning
In recent years the need for effective structuring of personal and business assets has been brought to the forefront of the minds of business owners and high net worth individuals.
Key changes to the taxation regime, family law property division, and increasing amounts of wealth being accumulated in superannuation funds “traditional estate planning” has been revolutionised.
As a result, we see more sophisticated estate planning strategies being developed in order to minimise the possibility of wealth being attacked by former spouses, creditors, business associates and (sometimes), disgruntled beneficiaries.
There are many factors to consider when completing your estate plan, particularly if asset protection and tax minimisation are high priorities.
Often this estate plan will incorporate a “Will with Testamentary Trust” rather than a “Standard Will”.
Difference of Standard Will and Testamentary Trust Will
A Standard Will, in its simplest form, is a testamentary document confirming choice of executors, beneficiaries and testamentary wishes regarding the distribution of their estate. It does not, however, offer any asset protection or tax minimisation benefits.
A Testamentary Trust Will is a type of Will that establishes a Trust or Trusts upon the death of the will maker. This kind of Will is designed to protect the will makers assets as they will belong to the beneficiaries’ Trust rather than the individual. This enables flexibility for how capital and income generated by those assets is distributed. The Trust only becomes active once the will maker is deceased.
The Trustees who decide how the income is distributed can also be beneficiaries of the Trust. However, the Trustees must act in accordance with the provisions set out in the Will regarding how the Trust is to be managed.
There are two commonly utilised types of Testamentary Trusts:
Discretionary Testamentary Trusts
– where the Executor gives the beneficiary the option to take part or all of their inheritance via a Testamentary Trust. The primary beneficiary has the power to remove and appoint the trustee and they can appoint themselves to manage their inheritance inside the Trust.
Protective Testamentary Trusts
– where a Beneficiary must take their inheritance via the Trust and does not have the option to appoint or remove trustees. This is useful where the beneficiary is not in a position to responsibly manage their inheritance due to age, disability or spendthrift tendencies and is often used when parents are leaving assets to their underage children.
The potential advantages of Testamentary Trusts include:-
- Asset Protection for the beneficiaries in the event of marriage or relationship breakdown (if the Trust is utilised effectively);
- Asset Protection for vulnerable beneficiaries including spendthrift beneficiaries, disabled beneficiaries or beneficiaries with a drug, alcohol or gambling problem;
- Asset Protection for “at risk” professionals or beneficiaries who may face claims from creditors or bankruptcy;
- Protection of pension entitlements;
- Income splitting advantages e.g. adult children, minors and/or other relatives on low incomes;
- Income tax advantages for children under 18 (who are taxed at adult rates instead of penalty rates outside the Testamentary Trusts environment); and
- Flexibility for the Trustee to exercise discretion about management and investment of capital and to take account of changing needs of beneficiaries.
- Tax Advantages
If a beneficiary takes their inheritance in their personal name (via a Standard Will), they will pay tax on the income generated from their inheritance at their personal marginal tax rate.
There may be significant tax advantages in taking an inheritance through a Testamentary Trust, particularly where the beneficiary has:
- a high personal marginal tax rate
- a partner on a lower income
- children and/or grandchildren who are minors or who have no, or a lower taxable income
- a tax free threshold of $18,200 (all Australian residents)
- a tax free threshold of $20,542 (Australian residents who qualify for low-income offsets).
The Trustee or Trustees can choose to distribute the income generated by the Trust in a way that minimises the tax burden of the beneficiaries. Depending upon the assets held in the Trust, a Testamentary Trust can potentially save thousands of dollars over its lifetime.
When it comes to protecting wealth and making provision for loved ones, it is essential to get it right. This means seeking legal advice from a Solicitor specialising in Wills and Estates to ensure that your estate plan is tailored to the specific needs and objectives of yourself and your family.
We also strongly recommends that you seek independent accounting, financial, taxation, and legal advice, tailored to your specific objectives, financial situation, or needs, prior to making any investment decision.