What is a testamentary trust?
A testamentary trust is not that dissimilar to a family trust (set up during one’s lifetime) with the primary differences being that a testamentary trust is established by your will and comes into effect upon your death and there are different taxation rules that apply to testamentary trusts.
A trustee is appointed under the will to hold assets in accordance with the terms of the trust for and on behalf of the beneficiaries. A discretionary testamentary trust provides flexibility to the trustee to distribute assets or income between different beneficiaries which provides a degree of asset protection (see below). Testamentary trusts can also be a fixed trust (with specific beneficiaries receiving a fixed share of the assets and income of the trust property).
Any asset of the estate can be left in a testamentary trust, including superannuation death benefits or life insurance proceeds received by the estate. It is important however that appropriate professional advice is obtained as to the tax consequences that arise from holding different types of assets in a testamentary trust.
What are the advantages of a testamentary trust?
There can be benefit in establishing a testamentary trust including asset protection and taxation advantages. Use of a testamentary discretionary trust can protect trust assets from claims by creditors of the beneficiaries given the discretionary nature of the trustee to distribute assets and income of the trust property to beneficiaries. Additionally, under the present taxation legislation, income from testamentary trusts can be treated as ‘excepted income’ for taxation purposes. This means that distributions to beneficiaries who are minors will receive the benefit of the tax-free threshold.