Want to learn more about testamentary trusts? In our blog below, KLD Legal will explain what they are, how they work, and why they might be a valuable tool for your estate planning.
What is a Testamentary Trust Will?
A testamentary trust is a will that gives the beneficiaries in a will the option of establishing a trust on the death of the will-maker (or testator) and transferring all or some of the gifts from the testator under the will into that trust.
From those trust assets, the trustee can then distribute income and capital to the beneficiaries named in the will who are the beneficiaries under the trust.
What are Discretionary Trusts?
Discretionary trusts are typically established during the settlor’s lifetime and are often used for estate planning, asset protection, and tax planning purposes.
By comparison, a testamentary trust is a trust that is established under a will and comes into effect upon the death of the testator.
Why have a Testamentary Will?
You should have a testamentary will for potential asset protection in marriage breakups, insolvency, etc., and for potential taxation advantages.
The creation of a testamentary trust by will does not amount to a disposal of assets and is not subject to capital gains tax. Placing assets (subject to CGT) in a discretionary trust inter vivos will be a disposal of those assets on which capital gains tax must be paid.
Distributions from a testamentary trust may be distributed up to the adult tax-free threshold to any number of beneficiaries completely tax-free. By comparison, if a discretionary trust is created inter vivos (while the settlor is living), the income from an inter vivos trust that passes to minor beneficiaries is taxed at a marginal rate that is higher than the rate of taxation under a testamentary trust.
When should I not have a Testamentary Trust?
If the trust is drafted to be highly effective in one area, such as protection against marriage breakups, it will be less effective in other areas, such as restricting the beneficiaries’ powers to enjoy and access their share of the income and capital.
KLD Legal can advise you on whether a testamentary trust will suit your circumstances and can prepare a testamentary trust will for you. Advice from other legal professionals and an accountant may also be required. Contact us today to get started!