Why Estate Planning Is Important

Testamentary Trusts

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Written by Alfio Michele Romano of Grasso Searles Romano lawyers 18 April 2020, and as amended on 2 December 2024.

Although most people think that Death Duty or Probate Duty has long been abolished, they fail to realise that Capital Gains Tax (CGT) has application to assets passing on death and that it is a proven fact that CGT now earns the Government much more revenue than death duties ever did.

Our firm can help plan your estate and help minimise tax liabilities by establishing what is called a Testamentary Trust in your Will. These are quite simply a trust created in your Will and funded by assets of your estate on death or by payments to the estate in consequence of your death (e.g. superannuation death benefits and insurance proceeds).

They are usually discretionary in nature, giving flexibility to your beneficiaries. There are 3 main advantages of establishing Testamentary Trusts in your Will, which we have outlined below.

1.     Tax Benefit

A major income tax advantage occurs when income from a Testamentary Trust is distributed to benefit a child, grandchild, or great-grandchild under the age of 18. This is because this income is ‘excepted’ under Section 102AG of the Income Tax Assessment Act from the normally higher rates of tax that children otherwise pay (children normally  earn$416.00 tax free through an ordinary discretionary / family trust, but after that they are taxed at the highest marginal rate).

However, under a Testamentary Trust children get the same tax treatment as adults. That means the first $18,200.00 of income is tax free, $18,201.00 to $45,000.00 is taxed at 16%and so on (as at 1 July 2024).

Let’s look at an example:

Dad leaves in his Will an income-earning asset (e.g. a warehouse) getting$60,000.00 income per annum, to his son John who is married with three children aged 3, 6 and 9. John is a successful businessman earning$180,000.00 a year. Without a Testamentary Trust, John would receive the income of $60,000.00 to be added to  his other income and he would pay tax at the highest marginal rate of 47% (subject to change) excluding Medicare and thereby would lose $28,200.00 in tax every year. If instead Dad had established a discretionary Testamentary Trust with John as trustee and John, his wife and three children as potential beneficiaries, John could evenly distribute the $60,000.00income to these three children ($20,000.00 each) and they could pay tax at adult rates which means they can earn up to $20,00.00 after low-income tax offset and pay NO tax. A saving of $28,200.00 EVERY YEAR! Any capital gain on disposal of the asset would similarly be distributed at John’s discretion (because he controls the trust) to minimise Capital Gains Tax payable.

2.     Protection of your children from their spouses in divorce / separation

Another great advantage of a Testamentary Trust, is that you can exclude any spouse of your beneficiaries from being a potential beneficiary of the Trust, if you would like to, by making the trust “bloodline only” means that only your direct lineal descendants of your blood can take under your Will(spouses and step-children are excluded). This means, in the instance one of your beneficiaries goes into matrimonial dispute with their spouse, your Executors step in as the trustee of the trust for that period. When that beneficiary is dividing their net asset pool in the Family Court (being, the assets your child owns with their spouse), all of your assets you have given to them through the Testamentary Trust, do not get included in this net asset pool and the spouse therefore cannot get any share of your estate.

If you have a simple Will, and your child goes into matrimonial dispute with their spouse, all of your assets that you leave to your child in your Will, will form part of the net asset pool in the Family Court and their spouse therefore gets a share of your estate.

3.    Asset Protection from Bankruptcy ‍

Similarly, the third main advantage is in the instance if one of your children beneficiaries were to become bankrupt, again your Executors step in as trustee of the trust during that period. The Trustees in Bankruptcy cannot touch the assets you leave your child in a testamentary trust. Whereas if you only have a simple Will, your assets can be taken by the Trustees in Bankruptcy to be used to pay off any creditors of your child beneficiary.

This is just some of the many advantages of Testamentary Trusts. Don’t delay, act today! Contact us to arrange a consultation with one of our experienced and dedicated lawyers on 07 3236 3999 or email us at reception@gsrlawyers.com.au.

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