Have You Considered Updating to a Will with Discretionary Testamentary Trust?
A well drafted Will with Discretionary Testamentary Trust can achieve your estate planning goals in a manner that offers your beneficiaries maximum asset protection and minimum income and capital gains tax liability.
How does it work?
Where your beneficiary has reached the age of 25 (or another age that you choose, called the ‘preservation age’) they can choose to take their inheritance outright (as a gift) or they can choose to take it through a trust. Where your beneficiary is under the preservation age, their share of your estate is automatically held in a testamentary trust until they attain the preservation age with directions that the capital be preserved for the beneficiary’s education, reasonable maintenance and welfare and medical and dental treatment.
Asset protection
A testamentary trust provides a greater level of asset protection than an outright gift. This is because the trustee, and not the beneficiary, is the legal owner of the asset. A trust can allow you to better protect your family assets from various threats, including a beneficiary’s wasteful habits or addictions, claims by creditors in bankruptcy proceedings or claims by spouses in a marital breakdown.
Tax effectiveness
One of the most significant and arguably most underappreciated benefits of a discretionary testamentary trust is its tax effectiveness. A discretionary testamentary trust allows a beneficiary to split and stream income and capital to the potential beneficiaries of the trust. The tax effectiveness of testamentary trusts arises out of the fact that rather than paying marginal rates of tax on the income generated by their inheritance (as would be the case under a simple Will), when assets of a testamentary trust are sold, or where income is generated from trust assets, the trustee has the ability to strategically pass out such taxable income to those beneficiaries who will pay the least tax (the income being assessable in the hands of the recipient beneficiary). This becomes particularly tax effective where the beneficiary has a spouse that does not work (or is on a lower tax rate) or where they have minor children (a testamentary trust treats distributions to minors as if they were adults).
Enduring power of attorney
As many people go travelling over the holiday break, it is also important to appoint someone who can act on your behalf in the event that you become incapacitated. If you do not do this then somebody (for example, your spouse) must apply to the ACT Civil and Administrative Tribunal for a guardianship order over you. There is no guarantee of success, and the process can be lengthy and stressful. Appointing an attorney before you lose capacity is a simple matter of filling in a form and specifying the matters (financial, medical and personal care) over which you want your attorney to have power.
If you would like to discuss an update to your Will, or to find out more about Discretionary Testamentary Trusts, please call Director of the Private Wealth Team Ashleigh Blewitt on 6188 3600.