Tax & Superannuation: Income - Guides
Income
11. Testamentary Trusts
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Last updated: 31 Jul 2015
- Tax strategies for estate planning can be significant when it comes to the transfer of wealth from one generation to the next.
- A testamentary trust is usually a discretionary trust created by a will that comes into effect after a persons' death.
- In a testamentary trust the share of intended inheritance for a beneficiary is managed by the trustee. The trustee is appointed by the testator (will maker) in their will.
- The will maker sets out the terms of the trust in their will and can choose to allow the trustee discretion to choose which beneficiaries receive capital and income from the trust. The will maker can also set limits such as maximum amounts on the discretion exercisable by the trustee.
- Testamentary trusts can be particularly useful for distributions to:
- children or minors; or
- beneficiaries who are disabled or need an ongoing provision of income.
- A desire to ensure a suitable tax outcome needs to be balanced against other estate planning objectives.
- There are numerous advantages of setting up a testamentary trust.
- If beneficiaries receive their inheritance through distributions from a testamentary trust there can be tax advantages in terms of income splitting. The trustee has flexibility regarding income distributions. They can choose which of the beneficiaries they distribute income to.
- Children under 18 are often recipients of income from a trust but the amount that can be distributed to them is often less than an adult individual. Trust income distributions to children are taxed at normal individual tax rates but the tax-free threshold for children when receiving income under a family trust is lower than the current tax-free threshold for Australian residents. The current threshold in 2015 is $18,200.
- Under normal circumstances when beneficiaries under a will receive inheritance in their own name they will pay tax on the income generated from the inheritance at their personal marginal tax rate.
- Income gains, capital gains and franked dividends can be distributed among beneficiaries in the most tax-efficient way.
- Setting up a testamentary trust can also offer potential asset protection for beneficiaries.
- There are also numerous disadvantages associated with testamentary trust.
- A testamentary trust is not relevant to every situation and all the normal tax administration requirements for a trust will be required.
- The terms set out in the will making the testamentary trust need to ensure the relevant requirements are met such as ensuring that distributions of income to children are not subject to the same tax rates as distributions from an ordinary family trust.
- Amendment of the terms of the testamentary trust after the death of the will maker is generally not possible. Consideration should be given to what will happen if the trust fails or does not come into being.
- Other non-tax issues in relation to the control of the trust may also need to be considered.
- For more information see our Wills and Succession topic.
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