A testamentary trust is a trust created pursuant to a Will and has two significant advantages for the Will maker and their current and future children, or grandchildren:
- Protection of your assets from any financial, or other difficulties that your children may suffer; and
- Significant taxation advantages in terms of income splitting.
Assets held by a testamentary trust are protected in the event that any of the family is involved in bankruptcy proceedings. This protection may be vitally important to them if any of them are carrying on a business at the date of your death.
A testamentary trust may also assist in protecting assets in the event that any of your family is involved in a divorce subsequent to your death.
A further advantage of a testamentary trust is that it allows income splitting. That is, the controller of the trust can allocate the trust’s income to those family members (beneficiaries) who are on the lowest marginal tax rate. Whichever beneficiary is allocated the income of the trust will pay tax on that income.
The biggest tax advantage of a testamentary trust is that it is one of the few structures where children under 18 are taxed at adult marginal tax rates instead of penalty rates.
You may be concerned about who will look after a disabled child after you die. You may want to provide for your child’s maintenance but are concerned that money left in the child’s care may be mismanaged by the child or the child’s carers.
Certain structures can be put in place to protect money from those who would seek to take advantage of the disabled child’s situation. Testamentary trusts and superannuation can both be used to protect a child’s inheritance and maintain it for the child’s life.
If you have disabled children you can consider the following strategies:
- Life insurance
Particularly if you are younger, life insurance can be held in a testamentary trust for the benefit of a disabled child.
Alternatively, life insurance can be held within a superannuation fund. A tax effective pension can then be paid from the fund. You should ensure that a pension can be paid from the fund, and that you can make a binding death benefit nomination.
- Special Disability Trust
Where the child still needs some disability support pension from Centrelink, a testamentary trust can be structured as a Special Disability Trust so that substantial amounts can be left for the child without jeopardising their pension.
Trusts established for disabled children may stipulate that the income and capital are to be applied for the child’s maintenance and benefit. The trust will operate like a regular testamentary trust, that is, your Will can effectively become the trust deed.
Careful thought needs to be given to selection of the trustee, as the child may not be able to counter any mismanagement of trust money by an unscrupulous trustee. If a suitable relative or associate cannot be found, a professional trustee company may be a good alternative in this situation.