Why use a testamentary trust Here is a quick run down. A testamentary trust (TT) is any trust set up in a will. When you have some assets it is worth considering helping up your heirs by setting up a discretionary testamentary trust (DTT) in your will. Some of the advantages of doing this are: Asset protection on the bankruptcy of an heir It you die and leave your spouse money and that spouse were to later become bankrupt the money would be susceptible to attack by creditors. A well drafted trust would provide extremely good protection against this. 2. Asset protection on divorce/separation of children etc Imagine leaving all your assets to your child who gets divorced or goes through a defacto separation. Those assets will form part of the assets of the marriage and be at risk of falling into the hands of that evil spouse. Using a DTT will segregate those assets inherited from the assets of the marriage. The DTT assets will not be assets of the marriage, they were not build up by the parties to the marriage and will therefore will be less likely to be attacked by the courts. There are different ways to structure the DTT to make this even stronger. However this is not foolproof. 3. Asset protection on spouse remarrying/Spouse’s death Imagine you die and everything goes to the spouse. He/she meets someone at your funeral and they start a defacto relationship - same as above with divorce etc, but what if your ex-spouse died? The new spouse would then be entitled to the estate, whether there is a will or not (may have to share it with your children). To prevent or reduce this risk you could make it so that no future spouse of your spouse can ever become a beneficiary of your DTT and cannot act as trustee, appointor or be an office holder in any trustee company appointed. This will assist in passing all of your assets to your children. 4. Asset Protection on death of beneficiaries. Some people want to control things from the grave more than other people. Imagine you left $1mil to an adult child who died just 1 year after you did. Your $1mil can then pass on to whoever the child willed it to. Using a DTT means you can control the funds in case this happens. 5. Control release of capital You could specify who can get access to the capital and when. You might want the children to have access to the income (rents, interest and dividends etc) of the trust, but to not be able to withdraw the capital (houses, shares, cash etc) until they all reach the age of 25 or 35, or until your youngest grandchild reaches the age of 25. This will stop or limit spenders. 6. General Tax Advantages If the trust is discretionary the trustee will be able to divert the income each year in a tax effective manner to the beneficiaries with the lowest taxable income. This can save a lot of tax. 7. Extra Tax Advantages for Children’s Income Minor children can generally only year $416 per year before they are taxed at 66%. But because of s102AG ITAA36 children are able to receive income from a will or a trust under a will and be taxed as if they were adults. This means each child could earn approx $20,500 per year and not pay tax. Imagine you die and leave $1mil in insurance proceeds. If this was left to your spouse she/he would invest it and if the earnings was $50,000 (5%) this would go on her other income and she would be taxed at say 37%. If it was left to the estate and via your will to a DTT the income could be distributed to the 2 children at $25,000 each. They would pay tax of a $1257 each compared to the wife’s tax of about $18,500. 8. Superannuation can be segregated Superannuation proceeds are taxed depending on who receives the funds and the component of super. Where the superannuation death benefits are paid to the estate the general wording of the will may mean the beneficiaries of the super could be a non dependant. This will cause the super to be taxed. However where the DDT is set up to include a sub-trust for superannuation proceeds (a super proceeds trust) the beneficiaries of this sub trust can be restricted so as to be limited to dependants. Your super can therefore be controlled via the DTT and all the usual benefits of the DDT obtained. 9. Long term strategies The DTT can invest and continue on for up to 80 years with all the tax advantages and asset protection advantages continuing. Your children can use it for other strategies too such as the trust could lend $1mil to the daughter to buy a main residence in her personal name. The trust would have a written loan agreement with her, could lend at 0% pa, and could take a 1st registered mortgage over the property. If she later went bankrupt the $1mil would be protected by the mortgage. She would get good asset protection, save interest, and have the flexibility to cause for the loan to be called in and reissued later if she wanted to move house. And she gets the land tax exemption and the CGT exemption because the house is owned in her own name. The son decides to become a developer. He can set up a separate trust, trust B, so the DTT, trust A can lend trust B some money for the development yet not be exposed (other than the money lent) if things go wrong. The daughter might decide to start buying rental properties. the 20% deposits can be borrowed from the DTT with interest payable to divert income into the DTT and then out to children tax effectively. The DTT itself could be used to invest directly in investment property, taking 80% loans. income would be more tax effective but there is a risk DTT deed could be drafted for multiple trusts, so DTT A could be used to conduct the risky property investments with DTT B being the safe holder of assets. If a tenant were to sue they would sue the trustee of DTT A and B’s assets would be safe. The DTT could run and operate a business There are probably more advantages which I will add later as I think of them.