Estate Planning & Testamentary Trusts
The property and assets belonging to a person who has died are called their deceased estate. This may include real estate, money in bank accounts, shares, and personal possessions.
What is a testamentary trust?
A testamentary trust is established when a will is put into action on someone’s death. However, a testamentary trust is not the same trust as the deceased estate. It is taxed separately and at different tax rates compare to the estate. If a testamentary trust is created, the executor or administrator will need to apply for a separate Tax File Number. A testamentary trust may be either a fixed or a discretionary trust.
The testamentary trust provides certain asset protection benefits along with the following taxation advantages:
a. generally, income distributed to minors (a person aged under 18 year at the end of the income year) from the trust is taxed at the top marginal rate. However, in case of the testamentary trust, the minor’s share of the taxable income is taxed at marginal rates and the tax-free threshold of $18,200 is available;
b. The trustee can request the Commissioner to grant discretion for any undistributed taxable income to be taxed at the individual marginal tax rates (though $18,200 tax-free threshold is not applicable). Moreover, the CGT concessions and refundable franking credits may be available;
c. The trust deed may be drafted in the way to allow for the streaming of franked dividends and capital gains to beneficiaries;
d. If the deed allows the trustee may split income between beneficiaries;
e. When the asset is passed from the trustee to a beneficiary there is no CGT liability;
f. Where a pre-CGT dwelling or main residence of the deceased is sold by the trustee within 2 years of the testator’s death the sale is tax-free.
While a testamentary trust is an effective estate planning tool, it is also quite complex. For example, a distribution of the deceased estate may be invalid if the testator delegates the testamentary power to others.
If you would like more information on trust structures and want to learn more about the most appropriate type of trust for your situation, visit our dedicated website All Trust Structures, make an online enquiry here or contact us on 02 9223 9166 to arrange an appointment with our tax lawyers.