Collingwood
3066 Victoria
Australia
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Smith Street Collingwood 3066 Victoria Australia | |
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ARTICLESTestamentary Trusts How do you provide for an incapacitated child or grandchild after your death? How can you ensure that a financially reckless son or daughter does not squander your assets and money when you are no longer here? The way to address such issues is by setting up a testamentary trust. A testamentary trust is any trust set up by a will. A trust is simply a legal document that gives one or more persons the duty and responsibility to look after property or money for the benefit of another person or persons, sometimes for many years or even the lifetime of a beneficiary. There are various advantages and disadvantages of testamentary trusts. Furthermore there are complicated taxation laws that impact on testamentary trusts. We strongly recommend that you seek advice from us in setting up testamentary trusts. Taxation considerations The advantage of a testamentary trust is that income distributed to minors is taxed at the ordinary marginal tax rate payable by adults, provided that the trust’s dominant purpose is to benefit the child or grandchild (eg. school fees, sporting equipment, food and clothing) rather than to secure a tax benefit. In other words if the trust was set up purely for the benefit of the beneficiary then they will not be penalised with a higher tax rate. This is in contrast to child beneficiaries under a family trust who may be taxed at a penalty rate if their income from the trust is above a certain level. For further details see the Income Tax Assessment Act 1936 (Cth) (‘ITAA’), sections 102AE and 102AG. Asset Protection Subject to satisfactory drafting provision can be made to protect your hard earned assets from claims which may be made by strangers in blood to your family, such as estranged spouses or defacto partners, and creditors. Account keeping It is important to appoint a trustee who will be diligent in keeping the trust’s financial records in order. This is important for two reasons. Firstly, various provisions of the ITAA require in-depth accounting records to be kept. Secondly, because a testamentary trust may endure for the life of a beneficiary, records may have to be kept for many years. A potential solution is to appoint a qualified accountant as a trustee; however, this can prove costly. Length of trusts A possible disadvantage of testamentary trusts is that the financial affairs of family members may be inextricably linked for many years. Sometimes serious family disputes may arise. Careful drafting of the trust can minimise disagreements and equip the trustee with the power to deal with disputes between beneficiaries. This may sometimes involve a trust being wound up. Testamentary trusts may also be challenged via the Administration and Probate Act 1958 (Vic). In certain circumstances the Court may order that provision be made out of the estate of a deceased person for the proper maintenance and support of a person for whom the deceased had responsibility to make provision. Power of trustees Testamentary trusts may give trustees massive powers over a person’s estate and assets. This is problematic when valuable business or personal assets are involved – everyone wants to assert their rights and problems may emerge. Often a testator will appoint a family member with a personal stake in the estate as a trustee. While this person might be honest and responsible it is often hard to avoid conflicts of interest. Careful thought must be given to the appointment of a trustee. Conclusion Despite some of these reservations testamentary trusts, provided they are carefully written, are a tax effective means of providing for potentially vulnerable beneficiaries, including:
Testamentary trusts can be complex documents. Please feel free to contact
GSM Lawyers – we have experience that
will benefit you and your family.
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