By Nicholas Kyriakoudes

When one disposes of their property by will depending on the circumstances it might be appropriate to distribute property to certain beneficiaries in a trust structure rather than as an outright gift. Given the notion of testamentary freedom lies at the heart of succession law, a testator is able to leave property in their will in a relatively liberal manner which includes leaving property on trust. There are numerous reasons why it might be appropriate to do this. If you are considering leaving property in your will in a discretionary testamentary trust, feel free to contact us to talk with one of our solicitors.

Tax benefits

As inheritances will constitute a capital gain to a beneficiary, tax is liable to be paid on a beneficiary’s entitlements under a will when they receive it. Where a large estate is involved and a beneficiary is in a higher tax bracket it may be preferable for that beneficiary’s gift to be left to them in a trust so that they can control the amount of income they receive each year from the trust, minimizing the capital gain they make in a given year and thereby reducing their tax liability over a period of years rather than if they were to receive an outright gift. A beneficiary may be given control over the distribution of income from the trust by being appointed as a trustee.

Additionally, income can be split across multiple beneficiaries to minimize tax liabilities. Where ordinarily children are taxed at high rates for income from trusts created inter vivos (that is during the testator’s life), children are taxed at adult rates for testamentary trusts. Accordingly, children can receive $18,200 tax free upon distributions left in a testamentary trust.

Protection of assets from creditors and family law proceedings

As trust property technically resides with the trustee as the legal owner, with beneficiaries only having an equitable interest to proper administration of the trust, beneficiaries don’t “own” trust property. This has numerous benefits where a beneficiary may be in certain situations such as bankruptcy or a relationship breakdown where creditors or ex-partners are attempting to satisfy debts or property settlements using a beneficiary’s property.

If you are concerned that one of your beneficiaries may divorce after your death, then by leaving the gift to them in a trust you avoid the property you wish to bequeath to that beneficiary from being split by family property orders (to read more about how family property orders are made see

https://hansonslawyers.com.au/property-settlement-division/ ). This is because trust property is generally considered a financial resource for family property division purposes and therefore does not form part of the property pool the court divides. However, there are certain rules in relation to trust property concerning control which may make trust property subject to family law proceedings (see https://hansonslawyers.com.au/are-trusts-included-property-division/ ).

If you are concerned that a beneficiary of yours may become bankrupt, then a trust can be set up. In doing so the trustee in bankruptcy won’t be able to use trust property or income derived from the testamentary trust to satisfy the bankrupt beneficiary’s debts as the trust property does not belong to the beneficiary but they merely have an equitable right to proper administration as described above.

Protection of beneficiaries from themselves

If you are concerned that one of your beneficiaries is reckless and may not be able to properly manage large gifts which are provided to them in your will, then setting up a testamentary trust may alleviate this concern. This as a steady stream of income may be able to be produced by the trust property and/or you may appoint the trustee to be someone other than the beneficiary you are concerned about. For example, if a beneficiary has a gambling problem or is poor at managing their affairs, by appointing a  trustee who is a responsible, proper, and trustworthy sibling, parent, or friend of the beneficiary, someone else can decide the distribution of income to the beneficiary each year and accordingly limit what the beneficiary receives according to their circumstances. Such an occurrence can avoid the undesired situation where the beneficiary may quickly expend their inheritance and provides a proper way to have the beneficiary’s inheritance responsibly managed.

Contact us

If you like advice in relation to your will or estate planning including whether it is appropriate to set up a testamentary trust and their advantages and disadvantages please contact us on 42 222 666 or by email at hansons@hansonslawyers.com.au