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Which Will? When should you include a testamentary trust?

The seemingly rapid approach of a new financial year should serve as a timely reminder for people to review their personal succession planning, particularly their Wills. It is important to ensure that people have an up-to-date Will in place which reflects their wishes upon their passing. Not only will this ensure that their loved ones are appropriately provided for, but it will help to avoid any disputes arising after they pass away.

Given the increasing complexities of people's financial affairs, effective succession planning should contemplate all assets, whether owned personally or via other entities such as super funds, companies or family trusts. However, the cornerstone of any succession plan remains ensuring that a person has a valid Will in place.

This article focuses on succession planning and the 2 types of Will products offered through Cleardocs:

  • 'ClearWill Online' - being a being simple Will with no testamentary trusts; and
  • 'ClearWill with Testamentary Trusts' - being a more complex Will which establishes testamentary trusts.

There can be various benefits of creating a Will with testamentary trusts, as outlined below. However, not everyone's circumstances justify a testamentary trust being included in their Will, in which case a simpler Will would be more suitable option.

Georgia Borg, Maddocks Lawyers

ClearWill with Testamentary Trusts

You can use the 'ClearWill with Testamentary Trusts' product to establish one or more trusts (other than a minors trust) within a person's Will. Such a trust comes into effect upon the death of the willmaker, with certain provisions of the Will operating as the trust deed.

What can the trusts be used for?

The 'ClearWill with Testamentary Trusts' product allows a willmaker to create a Will establishing any of the following trusts:

  • single or multiple testamentary discretionary trusts;
  • right of residence or use and enjoyment trust;
  • protected trust;
  • life interest trust; and
  • superannuation proceeds trust.

Asset protection for beneficiaries of the Will

One key benefit of establishing a testamentary trust as part of a person's Will is asset protection for beneficiaries: it provides a flexible and long term approach to asset protection, limiting the risk of claims on a beneficiary's assets as a result of bankruptcy or relationship breakdown. A testamentary trust can offer greater protection against dissipation of assets by a particular beneficiary, creditor or trustee in bankruptcy.

A testamentary trust can be established to ensure that the income and capital of the trust passes to the beneficiary, with the terms of the trust as set out in the Will determining the extent to which the beneficiary has control over those assets. The willmaker can appoint an independent person in control of the testamentary trust to ensure that the trust assets are invested and managed for the benefit of the beneficiary, or alternatively, choose to give the beneficiary complete control themselves.

Sensible tax planning

Another key benefit of this type of structure is that it provides an opportunity for sensible tax planning. Depending on the circumstances of each beneficiary of the trust, there may be significant tax advantages, particularly where the beneficiary has:

  • a high personal marginal tax rate;
  • a partner (or adult children/grandchildren) on a lower income; or
  • minor children or grandchildren. A discretionary family trust only permits the trustee to distribute up to $416 to minor children before penalty tax rates are applied. Whereas, a testamentary trust permits the distribution of up to $18,200 to a minor beneficiary tax free, with the individual marginal tax rates then applying for distributions in excess of this amount.

A testamentary trust has the significant advantage of enabling the trustee to stream or split income amongst the trust's discretionary beneficiaries in a way that minimises overall tax paid on the trust's income. The beneficiaries that receive the trust income then include this income in their own assessable income which is taxed at that individual's marginal tax rates. By streaming income to beneficiaries with low marginal tax rates, a trustee is able to minimise overall tax paid by the beneficiaries.

In summary, the 'ClearWill with Testamentary Trusts' product may be of assistance where:

  • there are significant assets that will form part of the willmaker's estate;
  • there is a desire to manage who will control the assets that form part of the trust;
  • there are a number of minor beneficiaries that would be benefiting from the trust; or
  • there is the potential for a beneficiary to be at risk to creditors.

ClearWill Online

If an individual's personal circumstances do not justify a need for a testamentary trust or trusts to be established within their Will, Cleardocs also offers a standalone Will product which does not establish testamentary trusts and caters for those with simpler personal circumstances.

Like the 'ClearWill with Testamentary Trusts' product, the 'ClearWill Online' product allows for various personalised clauses to be included in the Will, including enabling the willmaker to do any of the following:

  • choose whether they want their Will to survive their future or a subsequent marriage, in the event that they remarry;
  • appoint guardians for children under 18 years old;
  • make specific gifts of property;
  • make cash gifts including gifts to individuals and charities;
  • divide their assets in equal or unequal shares; and
  • make funeral directions.

The 'ClearWill Online' product also provides the option to create 'minors trusts', which protect a minor's inheritance upon that individual reaching 18 years or a later age nominated by the willmaker.

There is also the option to create 'mirror Wills' using the 'ClearWill Online' product, which can be a popular choice for married and de facto couples. Mirror Wills are 2 Wills that say the same thing, for example, that each willmaker leaves everything to one another and then upon the death of the second of them, the estate will then pass to their children.

In summary, the 'ClearWill Online' product may be of assistance where:

  • a willmaker's financial affairs are straightforward;
  • there are no complexities arising from the personal circumstances of the beneficiaries; or
  • a willmaker does not want to establish a testamentary trust.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of estate planning topics here.

Order Cleardocs Estate Planning document packages

 

Lawyer in Profile

Leigh Baring
Leigh Baring
Partner
PH: 61 3 9258 3673

Leigh is a partner in the Maddocks Tax & Revenue team.

Leigh regularly provides advice on:

  • structuring of businesses and transactions;
  • mergers and acquisitions;
  • corporate reorganisations and distributions;
  • sale of businesses;
  • demergers;
  • capital raisings;
  • joint ventures and property developments;
  • international tax (both inbound and outbound);
  • succession planning; and
  • liquidations.

His advice covers both direct and indirect tax considerations.

Leigh advises Australian and multinational companies, high net worth individuals, accountants and financial advisers on all areas of taxation law.