Do you need a Testamentary Trust in your Will?

27 February 2020

Jessica Olsen, Associate Wealth Adviser, Private Wealth Advisers |

With the largest intergenerational wealth transfer on the horizon, it is important to consider exactly how your wealth would be distributed if you were to pass away. Testamentary trusts are an effective estate planning strategy that may be suitable for some families. Testamentary trusts can be set up within a person’s will, and list which assets will form part of the trust on death. Therefore, they will only come into effect once the will-maker passes away. Once this occurs, the testamentary trust legally owns the assets it contains.

Beneficiaries will not have direct access to all assets at once and will be allocated income or capital each year by the trustee. Therefore, the nominated trustee must be someone in which you have complete confidence. The trustee will also be able to decide the amount that is given to the beneficiaries each year, therefore distributing income effectively, which may serve as a useful tax-planning tool.

Naturally, a testamentary trust will incur accounting and compliance fees each year once the will-maker passes away, so the expected value of the trust needs to be considered. A tax adviser can provide more information regarding the tax effectiveness of testamentary trusts and help navigate any potential changes.

Another benefit of these trusts is the ability to provide capital protection. When a testamentary trust is set up correctly, assets that are housed in a trust should be protected from any creditors, divorce or legal action that may occur to the beneficiaries. Additionally, having a mandated structure in place means beneficiaries are educated on how the wealth is managed, rather than being left to their own devices. This is useful for beneficiaries who are not familiar with managing cash flow for large sums of money.

A review of your estate planning should occur regularly to ensure it remains applicable to your current situation. For example, wills drafted prior to the introduction of the $1.6 million limit in 2017 can restrict how much of your superannuation can remain in the pension phase. If your will was written before this time, these changes might not have outlined that excess monies may be distributed via a testamentary trust.

There are many benefits of testamentary trusts; however, they are not necessarily appropriate for everyone. Get in touch with a BDO Private Wealth Adviser today to see if a testamentary trust will complement your financial situation.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in Australia to discuss these matters in the context of your particular circumstances. BDO Australia Ltd and each BDO member firm in Australia, their partners and/or directors, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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