Crystal Wealth Newsroom

Estate planning: Using a testamentary trust

Money Tips

Whether you’re leaving funds in your will to your young children or grandchildren, or to offspring who, for whatever reason, you’d prefer not to have access to a lump sum inheritance, a testamentary trust is a useful tool to deploy in your will.

“A testamentary trust is a trust that’s created on death,” explains John McIlroy, executive director of Crystal Wealth, “usually when there’s a capital amount that is left to a beneficiary or beneficiaries who are under eighteen. That money is set aside until they reach a certain age.”

The trust will have a trustee, who will usually be the executor appointed under the will. They will look after the money and can pay out of the trust depending on the instructions left.

The terms of the trust will usually state the beneficiary or beneficiaries can access the money when they reach a certain age.

“The most common age we see is twenty-five,” says John. “Although in some cases it may be eighteen, twenty-one or thirty.”

“It depends on the individuals or, more particularly, the children and how financially responsible they might be. Most people seem to be of the view that their kids don’t get to that stage until about twenty-five, or perhaps even later.”

The age of the beneficiaries is just one reason you may establish a testamentary trust.

If a beneficiary has learning difficulties or requires care, for example, a trust could be a good way of ensuring they’re provided for without giving them the responsibility of managing that capital.

“We run some testamentary trusts for clients whose children have had drug issues, for example, and they don’t want them to have access to the full capital,” says John.

“For instance, a client died and, because of the daughter’s drug issues, the client didn’t want her to have a lot of money in one lump. The daughter is about 50 now, and the payments of her entitlement are being paid out over 15 years.”

Minimising exposure
As well as the age, financial responsibility or characteristics of the beneficiaries, another reason to consider a testamentary trust in your will is if a beneficiary is running a business. If the money is in trust, it wouldn’t be exposed to any business risk – bankruptcy or legal action, for example.

“Also, some people do it because they have a fear that their child’s relationship may break down, and the inheritance may be caught up on a division of assets from a resulting divorce,” says John. “So, for family law reasons, they may leave the money in trust.”

Instructions left within testamentary trusts
Some testamentary trusts are set up quite simply – money being released at a certain age or a certain amount per week.

Others may have more specific stipulations.

“The trust provisions may say the income of that money and maybe part of the capital is used for educational purposes or other advancements of the child,” says John.

“I’ve seen some cases where the whole of the person’s estate is left to a trust, so there’s discretion as to who gets the income from that money over time.

“So they’re a useful and effective way of dealing with situations in which the person who has died, wouldn’t have wanted the children or other beneficiaries to get the money straight away, but have their needs looked after until they get to a certain more mature age.”

Tax benefits of testamentary trusts
While a testamentary trust isn’t something to set up just for tax purposes, it can have tax benefits for the beneficiaries.

“Where the money is left through this type of trust structure, the income of the trust is assessed to the individual child,” says John. “This enables them to use the tax-free threshold, which generally means that the first $20,000 of income in a year to a beneficiary would be exempt, and wouldn’t be subject to any tax.

“If you’ve got three or four children, you can have an estate generating just over $80,000 of income a year and not pay any tax.”

Fixed or discretionary testamentary trust
Another aspect to consider is whether you want your trust to be fixed or discretionary.

A fixed trust provides the beneficiaries with a predefined percentage of income and capital. For example, a trust with two children in it, each receiving 50%.

A discretionary trust, however, enables the trustee to decide who gets the income and capital.

“This can have some advantages from a tax point of view because you’ve got some discretion about who gets the income,” says John. “Obviously, there might be different tax outcomes depending on which beneficiary gets the income.”

Ultimately, however, a testamentary trust enables you to retain some control over how your estate is used, long after you’re gone.

“You can have some very detailed trusts or some with minimal instructions, but it’s about controlling who gets the income and the capital, being able to determine when they get it and, if you want, determining how they use it.”

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