Protecting the baby boomer estate

Baby boomers are increasingly incorporating testamentary trusts into their wills for the significant advantages they offer beneficiaries over ‘standard’ wills.

Combining a testamentary trust with their superannuation can give boomers a strong vehicle to prevent the tax office becoming one of the key beneficiaries of their estate.

The major advantage is the flexibility the trusts provide to manipulate tax thresholds to stream super and other income to children in the form of child allocated pensions.

Testamentary trusts are also valued for the asset protection they provide from creditors, as well as during divorce or where there is a spendthrift beneficiary.

By contrast, a will without a testamentary trust offers little tax efficiency and asset protection benefits to beneficiaries, according to solicitor and CFP Michael Fitzpatrick.

Fitzpatrick, also director of Clarendene Estate Planning Lawyers, says a testamentary trust lives for up to 80 years, providing flexibility, asset protection, and taxation advantages for many generations of a family.

Instead of leaving an inheritance directly to a nominated beneficiary, as in a standard will, a testamentary trust is used to nominate a trustee or primary beneficiary, who has wide discretionary powers over the inheritance.

The trustee has complete discretion to determine who receives the income of the trust, for example, including splitting the income among beneficiaries.

By selecting beneficiaries on low marginal tax rates, Fitzpatrick says, the trustee can minimise the overall taxation liability on the testamentary trust income.

“This is because tax is paid on testamentary trust income at the respective marginal tax rates of the beneficiaries who receive it,” he says.

The Tax Act allows children under 18 who receive income from testamentary trusts to be treated as adults for tax purposes, thus avoiding the ‘penalty’ tax rate of 48.5 percent that normally applies to income from trusts paid to minors.

In addition, the low income rebate allows each minor beneficiary of a testamentary trust to receive more than $6,000 of income tax free.

A testamentary trust can also enable beneficiaries to minimise capital gains tax arising from the sale of assets by choosing to distribute the capital gains to a beneficiary of a low or nil income.

Beneficiaries are also protected from the repercussions of bankruptcy by a testamentary trust, according to Tower Trust head of private client services Andrew McLachlan.

By law, he says, the assets of a fully discretionary trust are not owned personally by any beneficiary unless a trustee elects to distribute them to beneficiaries.

“The assets of a testamentary trust therefore do not form part of the beneficiary’s personal estate, and a creditor claiming against a beneficiary therefore cannot access the assets held in the trust.”

McLachlan says a testamentary trust may also provide some protection for a beneficiary who is experiencing family law difficulties.

“By enabling a beneficiary’s entitlement to be held in a discretionary will trust, their estate entitlements can be isolated from their personal assets.”

RetireInvest national technical manager Jennifer Brookhouse says testamentary trusts have benefits for the estate of a trustee in the event of divorce and also in the event of their children divorcing.

“A testamentary trust’s discretionary powers can ensure that the estate is left to the children of the trustee’s ‘bloodline’ and not, say, a daughter in law, in the event of a child divorcing,” she says.

“In this way the money in the trust is potentially a financial resource for a married child, but it cannot be split to satisfy the property settlement in the event of divorce.”

— Liam Egan