1. REDUCING YOUR TAX ON SUPERANNUATION
A Testamentary Trust can deal with any superannuation or life insurance proceeds payable on your death. Without proper planning, the taxation rate of 31.5% may apply to the full value of your superannuation payout as a result of your death. A Testamentary Trust will provide your executors with maximum flexibility to deal with any superannuation paid to your estate and minimise tax.
2. PROTECTING YOUR WEALTH FROM CLAIMS
When an asset passes directly to one of your beneficiaries, the asset immediately becomes available to any person who makes a claim against that beneficiary. If the asset is passed to a Testamentary Trust, the benefit from the asset is distributed over time and can maintain a high level of protection from claims.
3. MARGINAL TAX RATES FOR KIDS
When a beneficiary is under the age of 18, any income earned not from their personal exertion is subject to the flat tax rate of 46.5%. The beneficiary would not get the benefit of the tax free threshold and the marginal rates of tax, however, with income distributed through a Testamentary Trust the flat rate of tax is avoided for those under 18 years.
4. INCOME FLEXIBILITY
When an assets passes directly to a beneficiaries, the income earned from that asset is taxed on the beneficiary’s personal tax rate. If an assets passes to the Testamentary Trust, the trustee can choose how to distribute that income from year to year. This enables the Trustee to take advantage of the lower marginal tax rates of one or more of the potential beneficiaries.
5. KEEPING YOUR ASSETS WITHIN YOUR FAMILY LINE
For blended families it is often difficult to determine how to provide for a spouse and children from a previous marriage. A Testamentary Trust gives options to assist with this such as giving the spouse the income from the trust assets and beneficial ownership to the children.
6. PROTECTING THE ASSETS FROM YOUNG ADULTS
You may not want to give an 18 year old an estate worth from hundreds of thousands of dollars to millions. The Testamentary Trust can be used to give them income until they reach an age of sufficient capacity to invest and manage the assets.
7. ALLOWS YOUR SUPERANNUATION DEATH PROCEEDS TO BE HELD IN A TRUST
If the deceased’s superannuation is put into the estate then a Testamentary Trust may be able to be used to reduce tax, have multiple beneficiaries and the other benefits that apply to Testamentary Trusts can apply to the superannuation proceeds.
8. CGT BENEFITS
For a pre-CGT asset, the Testamentary Trust will have a cost base as at the date of death. For a post CGT asset the Testamentary Trust will inherit the deceased’s cost base.
9. PROTECT ‘AT RISK’ BENEFICIARIES
A Testamentary Trust can be used to protect assets for people who may have difficulties in managing their financial affairs eg. people with a disability, drug addicts, alcoholics etc.
About the authors:
This article has been co-authored by Steven Brown who is a director at Lynn & Brown Lawyers and Ryan Ashoorian, who is a lawyer here. Steve has over 18 years’ experience in legal practice and practices in commercial law, business law and estate planning. Ryan has been with the firm for over 3 years and practises in the areas of criminal law, probate and estates.