Christmas is a time that we reflect on the year gone by and celebrate with our family members. For some this can mean a get together at home or travelling overseas or interstate to spend time with family members. Everyone should have an estate planning strategy in place and the lead up to the Christmas season is the perfect time to consider your situation. Enjoy your holiday in the knowledge that, if the worst does happen, you have a plan which protects your assets, keeps your businesses and trusts running smoothly in the right hands and provides for your family in the long term.
A well drafted Will with Discretionary Testamentary Trust can achieve your estate planning goals in a manner that offers your beneficiaries maximum asset protection and minimum income and capital gains tax liability.
Where your beneficiary has reached the age of 25 (or another age that you choose, called the ‘preservation age’) they can choose to take their inheritance outright (as a gift) or they can choose to take it through a trust. Where your beneficiary is under the preservation age, their share of your estate is automatically held in a testamentary trust until they attain the preservation age with directions that the capital be preserved for the beneficiary’s education, reasonable maintenance and welfare and medical and dental treatment.
A testamentary trust provides a greater level of asset protection than an outright gift. This is because the trustee, and not the beneficiary, is the legal owner of the asset. A trust therefore allows you to protect your family assets from various threats, including a beneficiary’s wasteful habits or addictions, claims by creditors in bankruptcy proceedings or claims by spouses in a marital breakdown.
One of the most significant and arguably most underappreciated benefits of a discretionary testamentary trust is its tax effectiveness. A discretionary testamentary trust allows a beneficiary to split and stream income and capital to the potential beneficiaries of the trust. The tax effectiveness of testamentary trusts arises out of the fact that rather than paying marginal rates of tax on the income generated by their inheritance (as would be the case under a simple Will), when assets of a testamentary trust are sold, or where income is generated from trust
assets, the trustee has the ability to strategically pass out such taxable income to those beneficiaries who will pay the least tax (the income being assessable in the hands of the recipient beneficiary). This becomes particularly tax effective where the beneficiary has a spouse that does not work (or is on a lower tax rate) or where they have minor children (a testamentary trust treats distributions to minors as if they were adults).
Mary dies with a simple Will leaving an investment property and cash to her son John. In that income year, John’s inheritance generates $40,000 in income. John works as an accountant and is on the top marginal rate. He will pay $18,600 in income tax for that income year and for each year thereafter (assuming that the income remains constant).
Let’s assume Mary sought advice on her estate planning and had a Will with discretionary testamentary trusts prepared. Mary’s Will offers John the option of taking his inheritance outright or via a testamentary trust. John elects to take his inheritance in the trust. As John has two children, he is able to have trust income distributed equally between his children. John distributes $20,000 to each of his children and since they are able to receive $20,452 tax fee after applying the low income rebate, he is able to receive the entire $40,000 tax free. John has made a tax saving of $18,600 and that is only in year one.
As many people go travelling over the holiday break, it is also important to appoint someone who can act on your behalf in the event that you become incapacitated. If you do not do this then somebody (for example, your spouse) must apply to the ACT Civil and Administrative Tribunal for a guardianship order over you. There is no guarantee of success, and the process can be lengthy and stressful. Appointing an attorney before you lose capacity is a simple matter of filling in a form and specifying the matters (financial, medical and personal care)
over which you want your attorney to have power.
Make putting in place an estate planning strategy your new years resolution and ensure that should the unexpected happen, you will have provided for your family members in a tax and asset protective manner.