Everyone has heard of a Will and knows that it is an important legal document to have in place, but have you heard of a Testamentary Trust Will?
A Testamentary Trust Will, which we will refer to as a TT Will going forward, is a type of Will which gives your loved ones their inheritance via a discretionary testamentary trust rather than as a direct gift. TT Wills are very powerful estate planning tools which can save your loved ones tax and provide added asset protection in respect to their inheritance.
Sometimes perceived as something reserved for high net worth individuals, TT Wills are being much more commonly used to preserve inter-generational wealth. Below is a case study of a fairly regular scenario seen in our wills & estates practice illustrating some key advantages of TT Wills.
Jane and John – a case study
Jane and John have two adult children, Suzanne and Sam and two minor grandchildren to each child.
Jane and John would like to leave their estates to each other, and in the event they both pass, to their children equally. A very standard distribution situation.
Advantage one – asset protection
Jane and John are concerned that Suzanne’s start-up company may go bust leaving her bankrupt and that Sam will separate from his wife in years to come. They worry that their hard-earned money intended for their children may end up in the wrong hands.
If Jane and John were to choose standard wills that give their children direct gifts, their children’s inheritance would almost certainly be vulnerable in the event of a family law claim or bankruptcy.
However, if their children’s inheritance were gifted to each of Suzanne and Sam via a TT Will, as the inheritance will not be owned by each child directly, but by a separate legal entity – a trust – added protection is at hand. In the event Suzanne becomes bankrupt, assets held in the trust will not be available to Suzanne’s creditors. While there is no absolute protection in family law for assets directly or indirectly associated with a partner/spouse, the trust structure ensures Sam’s inheritance does not automatically form part of the family law property pool to be divided.
Advantage two – tax efficient income streaming
Jane and John want to ensure that Suzanne and Sam’s inheritance has maximum impact and that any income generated by the inheritance is dealt with in the most tax efficient way.
If they chose a standard will, and their children each received $500,000 on their death, any income generated from the $500,000 would be added to each child’s yearly income, the total of which would then be taxed at the child’s applicable marginal tax rate. So, if Suzanne purchased an investment property with her inheritance which made $30,000 in taxable rental income, this income would be added to her regular annual income from her start-up company of $90,000 and Suzanne would pay tax of approximately $32,000 (on her combined income of $120,000).
If Jane and John instead chose TT Wills, this could establish Suzanne as trustee and primary beneficiary in respect to half of the estate, and create a trust under which Suzanne’s children would also be considered beneficiaries. Under the TT, Suzanne would then have the benefit of being able to stream income on her inheritance up to the tax-free threshold of $18,200 to each of her own minor children per year with no tax payable (meaning up to $36,400 of income tax-free per year).
This means Suzanne could stream the $30,000 in rental income received from the inheritance as to $15,000 to each of her minor children applying it to their living and education expenses. In doing so, there would be no tax payable on the income from the inheritance, and Suzanne would only pay tax on her regular income in the amount of approximately $21,000 (based on her $90,000 start up income). By Jane and John using a TT will, Suzanne’s family is $11,000 better off. This saving could also apply to Sam’s share of his inheritance, saving a total of $22,000 in a year, which can be repeated for each year that the grandchildren are under the age of 18.
If you are interested in learning more about whether a TT Will is right for you, get in touch with our team of experienced wills and estates lawyers on 9318 4188. You’ll otherwise find details of our fixed fees and packages at www.mcmanuslawyers.com.au.
McManus & Co
Suite 103, 1 Thomas Holmes St
Maribyrnong VIC 3032
T: (03) 9318 4188
mcmanuslawyers.com.au
