Revenue aspects of testamentary trusts

A variety of different approaches to drafting can be taken, but the inevitable result is a document which is more complex than the normal will. In some cases, the trustees of the will are empowered to apply some of the trust moneys in establishing separate discretionary trusts and to then transfer residuary estate assets into each trust, in a manner similar to establishing an inter vivos trust. In other cases, separate discretionary trusts are drafted to arise without any separate “settlement” or other action being taken by the trustees. In most cases, the terms of the trust are are set out as an annexure or discrete section of the will.

3   WHAT ARE THE ADVANTAGES OF A TESTAMENTARY TRUST?

The advantages of a testamentary trust over the traditional form of will can generally be summarised broadly as providing flexibility in enabling all members of a family to enjoy the benefits flowing from family assets without any one or more of them actually having beneficial ownership of those assets. Specific benefits most frequently cited are:

  1. 1.       limiting the ability of creditors of any family member with financial problems to have access to inheritance assets;
  2. 2.       allowing young family members to have the use of cars, houses etc without having the ability to sell or encumber those assets;
  3. 3.       providing the ability to use family-owned properties by family members who are in relationships and limiting (at least from a practical perspective) the likelihood of claims on the break-up of any of those relationships;[3]
  4. 4.       the general taxation benefits resulting from the ability to split income between family members and also to direct different types of income to those family members who will benefit most from receiving a particular class of income (e.g. interest income to non-resident family members, taxed only at 15% withholding rate);
  5. 5.       the specifically-legislated tax benefits available to trusts established under deceased estates discussed below.

As far as the first four benefits are concerned, it is apparent that they are similar to the benefits that have made the inter vivos family discretionary trust the entity of choice of the Australian middle class and SME business sector over the last 40 or so years.

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