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Testamentary Trust: Getting Started with Organising Your Assets

If you’re writing your Will and considering leaving a specific asset or a portion of your estate to your loved ones after you die, you may want to consider using a Testamentary Trust. When you use this type of trust, you can ensure that your loved ones use your assets the way you intended. In this guide to Testamentary Trusts, we’ll break down what they are, why they are important and when to consider using them.

What is a testamentary trust?

A Testamentary Trust can be written into your Will and starts when you pass away. Its purpose is to hold and protect all, or some, of your assets, including property and investments. The trust looks after the assets on behalf of your beneficiaries.

Your beneficiaries are the people that will you leave the assets to in your Will. To manage the trust when you’re gone, you need to choose a trustee. They will be responsible for distributing the assets to your beneficiaries, according to the instructions you leave in your Will.

What assets can you include in the testamentary trust?

You can include several types of assets in a testamentary trust. These include:

  • Investments
  • Land or property
  • Cash
  • Valuable belongings (paintings, heirlooms, jewellery, etc.)

Money and investments held in a trust are trust capital. The capital can produce income, such as interest from bank accounts or dividends on shares. In addition, because the assets can also go up in value, the trust can be eligible for capital gains.

When you add assets to a trust, your beneficiaries do not own them, which provides an extra level of security from creditors and partners should a marriage or De Facto relationship end.

Who can be a trustee?

You can choose anyone to be your trustee, including the executor of your Will, a spouse, friend or family member. Whoever you choose, they must over 18 years of age and an Australian resident. You must trust this person as they are the legal owner of the assets in the trust and will have to manage them in the best interests of the beneficiaries. You can also appoint a trustee company or a legal or financial planning organisation.

When can the trust assets be distributed?

When distributing the Testamentary Trust, the trustee follows the instructions in your Will about who will receive the assets and when to distribute them. The trustee can distribute money or interest to beneficiaries at any time as long as it follows the instructions of your Will. The trustee can also determine when and how to distribute the assets. To do this, they need to use their judgement to meet the needs and interests of the beneficiaries.

Are there tax benefits to a testamentary trust?

The key benefit of Testamentary Trust is income tax redemption. The trustee distributes the income of the trust to its beneficiaries. The beneficiaries then invest those funds to earn an extra income. That income becomes a part of their salary, and they pay tax at marginal rates. If the beneficiaries decide to further distribute the funds to their children who are not working, then they can claim income tax benefits for each child.

Can you use a testamentary trust to set up a life-interest benefit?

When building your trust, you may want to consider setting up a life-interest benefit for your beneficiaries. A life-interest benefit means a person will benefit from an asset for the rest of their life, but they never inherit it.

Situations where a beneficiary may benefit from the trust for the rest of their life include:

  • To live in a property.
  • Earn interest on invested money.
  • Receive rental income from a property.

After their death, the assets will then pass on to the remainder beneficiaries, charities or whatever you specified in your Will. Without a life-interest benefit, the Testamentary Trust ends at a specified time or event that you outline in your Will, such as reaching a specific age or finishing an education.

The Next Steps in Planning Your Estate

It’s never too early to start organising your assets and planning your estate. By planning and completing a valid Will, you can ensure that your beneficiaries and belongings are cared for after you pass away. To help you get started building your Will, consider an online will kit.

Disclaimer: The content of this blog is intended to provide a general guide to the subject matter. This blog should not be relied upon as legal, financial, accounting or tax advice.

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