Testamentary Trusts

Hansens Accountants – Monday, January 16, 2012

There are two things certain in life – death and taxes. But with some effective planning tax payable can be minimized when a loved one passes on.

A testamentary trust is simply a trust that is established by a will. Many individuals during their lifetime establish trusts to hold their investments, to conduct an active business, or for other purposes. A testamentary trust can be discretionary or fixed in nature. They come into existence when probate has been granted and administration of the estate completed.

There are a number of advantages for employing testamentary trusts in estate planning. These include:

  1. To exercise control over the future use or transfer of estate assets. It is also a means of protecting and administering assets for the benefit of minor individuals or others under a legal disability.
  1. To protect assets from creditors
  1. For a beneficial tax outcome.

The second reason is often the most important. If assets are gifted to an individual who is at risk of claims from creditors or gets divorced, the estates assets are increasingly at risk. With 1 in 3 marriages ending in divorce, a testamentary trust can be an effective way of protecting an estate’s assets from a matrimonial dispute.

In general terms, the taxation rules applying to a discretionary trust are the same that apply to a testamentary trust. However there are two main advantages.

a)      Lower tax rates apply to beneficiaries who are minor children; And

b)      Lower tax rates may apply to undistributed income of the trustee.

For a confidential discussion on estate planning or the implementation of a testamentary trust, please contact us directly.

Vince Facciolo, Business Services


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