A testamentary trust is a trust established by a Will and they can be very useful for asset protection, tax effectiveness and providing for minor children. The best thing about a testamentary trust is that you provide your future beneficiaries with many options around how your estate may be dealt with. Because the Trust is not established until death, there is no ongoing cost to having one in your Will.
Testamentary Trust for Young Children
This kind of trust enables an inheritance to be held on trust for a child until they are able to inherit the money in their own right. A child under the age of 18 can’t inherit, and in many instances it is prudent to defer the inheritance until the child is ready to receive it. During the term of the trust, Australian tax law views the child beneficiary to be an adult for tax purposes. This means the Trustee can take advantage of the marginal tax rate system to maximise the value of the estate and to minimise tax payable on income generated by the Trust. Each child under a testamentary trust may receive a tax free distribution of $18,000 each year.
A testamentary trust can be established to pass assets to a beneficiary at a certain age. For many people 21 is seen as too young, and for larger estates 30 is often considered appropriate.
Protective Testamentary Trust
Many people are simply not in a position to inherit large sums of money. Disablement, mental illness, drug dependency are just a few of the reasons why a protective testamentary trust can be appropriate. In this situation the Trustee provides for the care and lifestlyle of the beneficiary who does not have access to the capital.
Another reason to use a protective testamentary trust is if a beneficiary is a bankrupt, or where the beneficiary is in an occupation that has a high risk of being sued.