When preparing a Will, the two questions most people think of are “Who to give my estate to when I die? And, “How can I stop others from others from getting my estate?  The answer to both questions lies in the structure of the Will.

The general structure of a standard Will allows a beneficiary (as an adult) to spend their inheritance when they receive it, as they wish.  They can invest it, use it all on a holiday of a lifetime or blow it all gambling! The assets are also open to attack from others.

On the other hand, a Will with a Testamentary Trust gives the Willmaker some control about how and when the assets will pass to the beneficiaries.  The assets can also be protected from attack from others as well as being secured if a beneficiary falls foul of unfortunate circumstances.

The two big reasons why a Will with a Testamentary Trust is better than a standard Will are:

  • Protection of assets; and
  • Tax effectiveness.

Protection of Assets

Protection from unjust claims. When an asset passes to a beneficiary under a standard Will, the asset is immediately available to attack from others.  The attack can be from a creditor, an estranged spouse or a disgruntled family member who is going through tough times.

Keeping your estate within your family line. If a spouse receives everything via a standard Will, it is not possible to ‘control from the grave’ how the spouse deals with the assets, particularly after remarriage.  A testamentary trust can give the spouse control of the annual income (and some capital) from the trust but at same time, the trust can provide for the assets to ultimately pass to the children (and grandchildren).

Protect the assets from spend thrift beneficiaries or abuse by beneficiaries.  The beneficiaries do not personally own the assets in the Trust.  Therefore, they cannot deplete the assets.  Likewise, any beneficiary that is suffering from drug or alcohol abuse cannot access the assets to satisfy their ‘binge sessions.’

Protect the assets from divorce.  If a child beneficiary gets divorced, the Family Court are unlikely to include the assets in the Testamentary Trust as part of the ‘marriage assets’ for division between the spouses.

Tax Effectiveness

Special tax concessions for beneficiaries under 18.  Income earned on assets in a Testamentary Trust is “exempt trust income.” When such income is distributed to minors, they are not taxed at penalty rates.  Instead, adult marginal rates of tax apply. The benefit of this concession can apply to current and future generations of the family of the Willmaker and may save a large amount of tax over the life of the Testamentary Trust.

Capital Gains Tax Disregarded by the ATO.  When an asset is passed to a beneficiary under a standard Will, the transfer may trigger CGT for the beneficiary. When assets are passed to a beneficiary via a Testamentary Trust, the ATO will disregard any capital gain on the asset.  Some exemptions may apply.

Income Flexibility.  When an asset passes directly to a beneficiary (under a standard Will), they become taxable on all the income from that asset.  However, when the asset passes to the Trustee of a Testamentary Trust, the Trustee can choose how to distribute the income from year to year.  The Trustee can distribute the income to beneficiaries who are on lower marginal tax rates.

The days of using a standard Will are becoming less suitable.  Today, people’s affairs are no longer as simple as they were 50 years ago where the wife stayed at home, the primary home was the main asset, there were no global assets, superannuation didn’t exist, very few people had their own businesses and protection from the Family Court wasn’t contemplated.

If you want to know more about which type of Will suits your circumstances, contact Shirley Tascone during office hours on 0450 499 822 or email at shirley@sbtlegal.com.au.