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Accountants & Financial Planners: Protecting Clients’ Estates with Testamentary Trusts

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As accountants and financial planners, you have insights into your clients’ financial position far before we, as estate planners, do. Becoming familiar with the many benefits of Testamentary Trusts in a variety of scenarios will help you further protect your clients and their long-term goals.


What is a Testamentary Trust?

A Testamentary Trust is a discretionary trust established by a client’s Will for the primary benefit of a beneficiary or beneficiaries. When that client dies, the assets that would have been left to the beneficiary in their personal capacity are instead distributed to their chosen Trustee to hold and manage on behalf of the beneficiary. 


Aren’t Testamentary Trusts only for beneficiaries who are vulnerable or who can’t manage their own affairs?

Certainly, a Testamentary Trust can be utilised as a protective structure for a vulnerable beneficiary such as a minor child, a beneficiary with special needs or a disability, or a beneficiary suffering from personal difficulties such as addiction or dependency. In this type of Testamentary Trust, the primary beneficiary will not usually exercise control of the trust – it will be managed by someone else for their benefit.

What people may not realise is that a Testamentary Trust is not just for vulnerable beneficiaries. A Testamentary Trust can provide significant benefits to an adult beneficiary who is of perfectly sound mind, logic, and decision-making capacity. 


Why have a Testamentary Trust?

Benefit 1- Asset Protection – Family Law and Relationship Breakdown

Many clients who are parents will be concerned about the financial impact of a relationship breakdown for their adult child. If an inheritance is received by an adult child in their own name, the assets inherited may be at risk of being divided between the child and their spouse in the event that their relationship breaks down and a family law property settlement is required. This could result in significant financial risk to your client’s adult child, with the result that a portion of the wealth your client has created and passed along to their child may end up in the hands of their spouse.

A Testamentary Trust can be structured in such a way to provide asset protection benefits to the primary beneficiary by protecting or quarantining the assets in the trust from division with a spouse of the beneficiary.

This may be attractive to your client if their beneficiary is in a relationship that your client views as being unstable or unsustainable, or simply to protect against that eventuality arising in the future. The risk of relationship breakdown is real and significant, with more than 50% of relationships ending in separation.


Benefit 2 – Asset Protection – Bankruptcy

A well-structured Testamentary Trust can also help protect or quarantine assets held for the beneficiary from the financial risk of being vulnerable to creditors or a trustee in bankruptcy, in the event that your client’s intended beneficiary encounters financial difficulty. 

This may be appealing if your clients intended beneficiary is at a higher than average risk of financial stress –  perhaps for example if they are small business owners; self-employed; or a professional who is at risk of being sued for professional negligence… 


Benefit 3 – Tax Planning

The use of a Testamentary Trust by your client could result in a significant reduction of tax paid by the beneficiary. 

A Testamentary Trust has two main attributes that may provide significant tax benefits. One is the ability to stream income to tax-effective beneficiaries. The other is an exemption from penalty tax rates usually payable by minors. 

Let’s say your client leaves an inheritance to their son, Fred, in his own name, rather than utilising a Testamentary Trust.

Fred will pay tax on any investment income earned by the inheritance, at their own personal marginal rates. So say the inheritance earns $60,000 – this will be added to Fred’s own income and taxed at up to the top marginal rate of tax (currently up to 47c in the dollar including the Medicare levy). This means Fred pays up to $28,200 to the taxman on any investment income earned from the inheritance. 

However, because your client has been educated by you about the benefits of a Testamentary Trust, instead he/she creates a Testamentary Trust for Fred’s benefit. The $60,000 in investment income is earned by the Testamentary Trust, rather than by Fred himself. Income can be streamed to tax-effective beneficiaries, so Fred distributes:


  1. $18,200 to his 10-year-old daughter, Pebbles;
  2. $18,200 to his 12-year-old son, Bam-Bam;
  3. $18,200 to Wilma, who is on maternity leave.
  4. $5,400 to himself. 


Because there are no penalty tax rates applicable to minor beneficiaries of a Testamentary Trust, Fred is able to take advantage of his family’s low marginal tax rates. The total bill from the taxman is now $2,538, rather than $28,200. 


Benefit 4 – Effective Succession Planning for the Next Generation

A Testamentary Trust can exist for up to 80 years, meaning that it can be utilised by your client’s beneficiary in their own succession planning to continue to provide benefits for successive generations. This can assist with effective planning and flexibility in relation to the transition of wealth to future generations. 

A Testamentary Trust can provide management opportunities in relation to issues such as Capital Gains Tax and plan for the advantageous timing of disposal and acquisition of assets. A well-structured Testamentary Trust can provide your clients’ beneficiaries with significant asset protection and tax-planning opportunities over their lifetimes and into successive generations.


Related: Family Business Succession Planning – preserving family wealth

Why testamentary trusts are not only for the wealthy


The DDCS Estate Planning team are highly experienced and specialise in helping set up Testamentary Trusts. To discuss your circumstances, phone our team on (02) 62127600 or fill in the contact us form and our team will be in touch.