Testamentary Trusts are trusts established in a Will of a person and such trusts are very effective estate planning tools. Most of the Testamentary Trusts are discretionary trusts that provide the trustee of the trust with an unfettered discretion on how the assets and/or income of the trust are distributed to the beneficiaries.

Testamentary Trusts are most commonly set up in situations where the testator/testatrix:

1. wishes to place control of the estate into the hands of a trustee rather than distribute the estate directly to the beneficiaries after death. Testamentary Trusts can be established for up to 80 years and can potentially provide income and benefit to a few generations of beneficiaries.

2. requires asset protection for the estate. Since the inheritance does not pass into the beneficiaries’ personal names but rather becomes an asset of the trust, it may therefore be protected from creditors in bankruptcy or insolvency or an ex-partner of a beneficiary in family law proceedings.

3. aims to minimise tax paid by the estate through streaming or splitting income made by the trust to beneficiaries, who may have lower incomes and therefore lower tax rates. Unlike ordinary discretionary trusts, where any income paid to minors is penalised, Testamentary Trusts are given a special treatment in that trust income can be distributed to minor beneficiaries (up to the adult tax-free threshold amount). This means that all beneficiaries, including children and grandchildren, are able to receive approximately $18,000 of tax-free income every year, with the overall effect of minimising tax paid by the testamentary trust. Another tax advantage of setting up a Testamentary Trust is that an asset, that would ordinarily be subject to a capital gains tax, can be transferred by a trustee to the beneficiary/ies without triggering a CGT event and any capital gains made would be disregarded by the ATO.

4. wants to provide for beneficiaries with disabilities, illnesses, addictions or any other problems that may result in the estate funds being wasted by those beneficiaries. If there is a beneficiary who requires ongoing medical or other assistance (including education), a Testamentary Trust could provide for a mechanism through which that beneficiary will be provided and cared for in the future.

5. wants to preserve a beneficiary’s government benefits. Commonly, assets held in a Testamentary Trust are not taken into account when calculating the pension eligibility of a beneficiary.

6. looking to direct all superannuation and/or life insurance policy payout into the estate. It is generally more beneficial to receive those entitlements through a testamentary trust structure.