As Gold Coast Wills and Estate Planning Lawyers, we encourage our clients to take control of their family’s future by ensuring all the necessary estate planning safeguards in place. The benefits of a testamentary trusts have literally been life-changing for some beneficiaries.
Income streaming with testamentary discretionary trusts
When a beneficiary in your Will earns income from a gift – eg, rent on an investment property, or capital gains when they sell it – that income will be taxable.
While that beneficiary has children under 18 years old, a ‘testamentary discretionary trust’ could be used to ‘stream’ that income to the kids.
The benefit of streaming is that the beneficiary can take advantage of their children’s preferential tax rates.
Consider this example:
- Mary earns a $180,000 salary & has 4 kids under 18 years old.
- Mary’s mother, Jane, leaves an investment property worth $1 m to Mary.
- Five years later, Mary sells the property for $1.3 m, making a $300,000 capital gain: 2016 / 2017
Tax on $300,000 = $110,632
Tax on $75,000 (x 4) = $63,688 $75,000 streamed to 4 children $15,922 x 4 = $63,688
Tax saved: $46,944 – This is the saving every year whilst the children are under 18 years of age.
You have no idea what circumstances your family will be in the day you pass away. You only hope that it is a long long way into the future.
What you do want to happen is that whatever assets you have accumulated over the years are enjoyed by the people that you want.
Here are a few examples where a Testamentary Trust should be considered:
a) Family Court dispute
Is there a possibility that one of your beneficiaries could become involved in a Family Court dispute with their spouse in the future?
Would you prefer your assets to be enjoyed by your children and grandchildren? Or would you be happy for your son-in-law or daughter-in-law or take a percentage of your assets – which they can then enjoy with their new boyfriend / girlfriend (or both).
The case where an ex daughter-in-law attempted to keep her entitlement in her former mother-in-law’s Will even after she had left her husband, and even after the mother-in-law had developed dementia, is a great example of what steps people will take to get hold of your life’s work!
b) ATO Disputes, Bank Disputes, Court Judgements, Bankruptcy Action!
Is there is a possibility that one of your beneficiaries may owe money to a creditor at sometime in the future – which they just cannot repay?
Where a beneficiary is required to repay a debt to the Australian Taxation Office, a Bank or to some other creditor, whether or not court action has been commenced, your assets could be taken and the sale proceeds used to repay these debts.
Whilst you can argue that there is a moral duty for your children to repay their debts, their debts are not your debts. Whilst talking about a moral duty, without getting too distracted, there can of course be many circumstances where there are serious concerns regarding the ethical conduct of the ATO, banks and other creditors. Finally debts may rise due to plain bad luck, ill-health, failed investments or unemployment.
At the end of the day, your life’s work should be preserved for the benefit of your grandchildren.
c) Risk of litigation
As our declining society becomes more litigious, following the lead of the USA, do you have any beneficiaries who work (or could in the future) in a business or profession where there is a potential risk of litigation against them?
Even where there may be no current risks or threats, business owners or professionals do not (or should not) own assets in their own name. The same principles apply to your assets which you may wish them to have once you are gone.
d) Personal factors for your children
Do any of your beneficiaries suffer from a mental incapacity or impairment, or are addicted to drugs, or perhaps are unable to control their spending, or are easily influenced or manipulated by others?
There are many ways in which your assets could be frittered away – wasted on frivolous pursuits. An independent trustee, or perhaps a joint trustee arrangement would be useful to ensure that the beneficiary was able to enjoy the benefits of your assets.