Using testamentary trusts in your will

A testamentary trust is a trust created under your will. Rather than make a gift in your will to a beneficiary directly you can create a trust in your will to hold such property for a named beneficiary or class of beneficiaries who will have the use and enjoyment of such estate property without the associated risks of direct ownership. If you have direct ownership of an asset that asset is available to meet the claims of creditors and the trustee in bankruptcy if you are made bankrupt, for example.

The testamentary trust is also an effective tax structure that can be used to stream income from wealth generating assets gifted to the testamentary trust to beneficiaries by taking advantage of the marginal tax rates of each beneficiary of the testamentary trust to maximise the after tax distribution of income earned by the testamentary trust.

Like a discretionary trust, the beneficiaries of a testamentary trust do not have any interest in the property held by the trustee and like a discretionary trust, the testamentary trust has a life of up to 80 years.

Testamentary trusts are legitimate estate planning structures and are part of the tools of an effective estate planning strategy.

Pre and Post CGT Assets

A pre Capital Gains Tax (CGT) asset is an asset acquired before 20 September 1985 and is not subject to CGT. A post CGT asset is an asset acquired after 19 September 1985.

If you own pre and post CGT assets they have a different tax profile when distributing such assets in your Estate.  Broadly, a pre CGT asset you own as at the date of your death will on your death get a “step up” in its cost base which is used for the purposes of calculating any capital gain on the subsequent sale of the asset. A post CGT asset will have the same cost base as that of the deceased, being in general the amount the deceased paid for the CGT asset. This means that assets of the same value can have very different tax results.

An Estate plan should clearly identify and allocate pre and post CGT assets consistent with the intentions of the will-maker to distribute his or her Estate in a manner that is tax neutral between beneficiaries.

Unpaid trust distributions

Estate assets may include entitlements that the deceased has to income from a family trust or investment trust that have not been paid to the deceased (commonly known as UPE’s or unpaid present entitlements). In some cases, these UPE’s may have accumulated over a number of years and represent a significant estate asset.

If the deceased was the controller of a family trust or investment trust he or she may have reinvested the income in the trust rather than make a cash payment to themselves. Such reinvestments may be recorded in the books of the trust as a liability of the trust to the beneficiary or as a separate capital account held by the trust for the beneficiary (called a sub trust). If you are an executor you should obtain copies of the financial statements of the trust to verify amounts owed to the Estate by the trust.

These unpaid trust distributions can also be gifted as tax free distributions in your estate.

Bankrupt beneficiaries

All after acquired property of a bankrupt vests in the Trustee in Bankruptcy appointed to a bankrupt’s estate. This includes any property that you inherit from a deceased estate that a bankrupt beneficiary has an interest including the interest of the bankrupt beneficiary in the un-administered deceased estate.

Bankrupts should be excluded as beneficiaries in their own name and only be provided for by way of a testamentary trust in which they are not the trustee.

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