Avoid unnecessary complexities for the people you love

by Ross Munro, Financial Adviser

If you want the best financial outcome for your family and loved ones in the event of your death, you need to plan ahead. Your assets, superannuation and potential insurance benefits could add up to a significant inheritance for your beneficiaries, but without advice, you could leave unwanted tax complications for the ones you love.

If you have young children, or want to be able to support your surviving family members, a testamentary trust may be appropriate for your needs. A testamentary trust can deliver advantages including greater control and protection of assets, as well as significant tax savings for beneficiaries under 18 years of age. Our scenarios outline the potential benefits of a testamentary trust.

Under current taxation laws, within a testamentary trust, income generated is taxed at adult marginal tax rates, as opposed to the much higher ‘minor’ tax rates, and children under 18 also receive the full tax-free threshold (not offered in other structures such as family trusts).

Scenarios

Daniel and Sophia have 12-year-old daughter, Victoria. When Daniel passes away, he has assets of $400,000 in his name plus a $1,000,000 life insurance policy.


Scenario A: Distributing assets to a child
Daniel’s Will instructs that the assets be left to Sophia.

Outcome:

Sophia
Asset $1.4 million
Earnings* $84,000
Tax** $18,847
Net cashflow $65,153

*Earnings assumed at 6% pa
**Tax assumes no other income


Scenario B: Using a testamentary trust
Daniel includes a testamentary trust in his Will with Sophia as trustee and where income is distributed equally to Sophia and Victoria.

Outcome:

Sophia Victoria Trust
Asset

$1.4 million
Trust earnings* $84,000
Distributed earnings* $42,000  $42,000
Tax** $5,317 $5,317
Net cashflow $36,683 $36,683

*Earnings assumed at 6% pa
**Tax assumes no other income


Benefits of Scenario B

Tax savings: Income from a testamentary trust with children (like Victoria) as beneficiaries is taxed at adult marginal tax rates rather than at the significantly less advantageous minor (top marginal tax rate) tax rates. The total tax payable by Sophia and Victoria is $10,634, a tax saving of $8,213. This will continue until Victoria turns 18.

Control and flexibility: As trustee, Sophia maintains control of the assets and has flexibility in how the assets and income are managed.

 Asset protection: If Victoria was over 18 and established a de facto relationship, the assets in the testamentary trust would not be exposed to a claim by her de facto partner.

If Sophia was operating a business, the testamentary trust would provide protection against creditors.

If Sophia began a new relationship in the future, the assets would be protected from a claim by her new partner.

In a nutshell:

A testamentary trust is a legal arrangement that is put in place following a person’s death, as specified in their Will.

A testamentary trust holds estate assets on behalf of the beneficiaries of the estate. Beneficiaries do not legally own the assets while they remain in the trust.

A testamentary trust is controlled by an individual appointed by the deceased, known as the ‘trustee’. As the trustee is responsible for when and how the estate assets in the trust are distributed to beneficiaries, it is very important that the trustee is someone trusted by the deceased to manage the trust according to their wishes.

Beneficiaries receive assets via the trust under the control of the trustee, rather than directly from the estate in their own name.

Key advantages:

#1 Flexibility: Beneficiaries may choose when and how they take their inheritance so long as this is approved by the trustee.

#2 Tax minimisation: The trustee has the ability to allocate taxable income and capital gain generated in the trust to one or more beneficiaries who are able to take advantage of tax-free thresholds.

#3 Protection of assets against creditors: None of the assets in a testamentary trust are legally owned by the beneficiaries. This can protect the assets from creditors or the bankruptcy of a beneficiary. The assets in a testamentary trust may also be protected in the event of the divorce or relationship breakdown of a beneficiary.

Is a testamentary trust right for you?

There are many legal and financial matters to think about when considering whether or not to include a testamentary trust in your Will. In particular, it is important to take into account your levels of insurance cover when determining the value of your estate and evaluating the benefits of a testamentary trust in your situation. It is important to seek professional advice to help you make this important decision.

To discuss whether a testamentary trust is appropriate for you, please contact Brett, Ross, Steve or James. We can work with your estate planning solicitor as required. Please call us on 3007 2007 or email bcribb@stratusfinancialgroup.com.au, rmunro@stratusfinancialgroup.com.au, snicholas@stratusfinancialgroup.com.au or jmarshall@stratusfinancialgroup.com.au

Recommended:

2-minute video on testamentary trusts

The Basics of Testamentary Trusts

What I Wish I’d Known – Financial Advice for My Younger Self #2: How To Pay For Insurance

How to Protect the Entire Family #1 Consider insuring all family members that can be insured

Risk Insurance – There’s No Substitute for Professional Advice

At Stratus Financial Group, we help families, professionals, executives, business owners and retirees manage their complex financial affairs and coordinate their professional advisers. 

Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. This is general advice only and does not take into account your objectives, financial situation or needs, so you should consider whether the advice is relevant to your personal circumstances. You should also read the relevant Product Disclosure Statements (PDS) before making any financial decisions.