The Brief for Accountants & Financial Planners
March 2018

A testamentary trust in operation...

Two minute scenarios...

In most of our Wills the Willmaker has requested the executor consult with their Financial Adviser when managing their estate. In case that happens to be you, let's look at some scenarios to highlight how a testamentary trust works in practice.


It's usually their choice...

RIchard has passed away and his wife Sarah has an option as to whether the inheritance is transferred into a testamentary trust that she controls or whether she receives those assets in her own name. This option is standard in our Wills with general purpose discretionary testamentary trusts and do not refer to special purpose trusts with for example, access restrictions. Sarah wonders what using a testamentary trust would involve.

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Both the Accountant and Financial Planner can have a role to play...

The terms of the testamentary trust are contained in the Will itself. Each beneficiary will need a certified copy of the Will which becomes their Trust Deed. This is the document they will need for example, to present to the Bank in order to set up a bank account.

They will need a tax file number (TFN) established for the trust and a set of accounts prepared on an annual basis in order to submit tax returns. This is where the Accountant has an on-going role and of course, the beneficiaries often seek advice from the Financial Planner for investment purposes. For tax purposes, these are discretionary trusts.

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Why would Sarah choose to set up a testamentary trust?

It's simple - when the benefits outweigh the costs. Some of these include:

 

Bankruptcy protection for the inheritance. This is important if the beneficiary is in a high risk career and can be sued for negligence or is exposed in some way as a business owner. Possible litigation, bad investment decisions, plain bad luck - there are a number of reasons why people end up in financial trouble however any funds in a discretionary trust (which is what these general purpose testamentary trusts are) cannot be accessed by a bankruptcy trustee.

 

Tax savings. The beneficiary can receive considerable tax savings by distributing income to family members. For example, if a husband invests inherited funds via his testamentary trust he can distribute the income to his wife and/or children with the potential resultant lowering of overall tax.

What if the children are already working? There may be grandchildren to help at some stage. These trusts last for 80 years and with many grandparents helping out with school fees, mortgages etc., this again becomes tax effective.

 

To help protect the inheritance in a future family law case. Whilst the Family Law Court can direct a spouse who has control of a discretionary trust to hand over assets to their spouse (See Ashton v Ashton [FamCA 1986]), having the inheritance in a separate testamentary trust does help identify what that spouse brought to the relationship.

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Help your clients with their estate planning - and get to know your next generation of clients

Become an Alliance Partner and access our estate planning package and earn revenue while helping your clients through the estate planning process. For more information on this estate planning service for Advisers, please contact us on info@irongrouplawyers.com.

Alternatively we welcome your direct referrals for clients who need to have their Wills prepared. All we need is a name and phone number emailed to referrals@irongrouplawyers.com.

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