We all work diligently to provide for our dependents and eventual beneficiaries. Protecting their future wealth is an excellent legacy for our survivors. So how do we provide this extra benefit? 

One idea when making a Will is to establish a testamentary trust or trusts that commence upon the death of the Will maker. 

The Will would specify a range of beneficiaries and give the Trustee power to distribute income generated from estate assets amongst those beneficiaries. This distribution may be fixed, discretionary or it may be a combination of these. The potential beneficiaries may be very broad, or the Will maker may decide that only blood relatives should benefit from the Will Trust. A separate Will Trust is often set up for each beneficiary. 

In my opinion, a non-vulnerable beneficiary should always be given the option in the Will of taking their inheritance personally, instead of via a Trust, particularly where the amount received is relatively small. 

Testamentary trusts can be useful in protecting family wealth from the loss of inheritances by adult beneficiaries who may have financial difficulties, relationship problems, intellectual disabilities, and gambling, alcohol or drug addiction problems. 

It is not uncommon for people suffering a variety of disabilities to be unable to properly manage their financial affairs. At the same time, families wish to ensure that adequate funds are set aside to meet their reasonable needs. 

The flexibility of a testamentary trust, sometimes combined with a memorandum of wishes as to how the trust should be administered, can be an appropriate arrangement. 

Unfortunately, the incidence of bankruptcy has continued to increase. Often personal guarantees will be provided to support family members' /entities' borrowings. However, if the bankrupt's inheritance has been provided through a Will Trust, it will be protected from creditors. 

Another advantage of using Will Trusts is that they can minimise the potential for sibling disputes because each primary beneficiary can control their own separate trust. 

Other planning opportunities using a Will Trust include protecting assets from your spouse's next partner, providing directly for your own children and providing for the second spouse only in blended families. 

By far the greatest immediate benefit of a Will Trust is the potential to provide significant tax savings. 

For example

Farmer Brown creates a Will Trust to receive the benefit of his $1m life insurance policy. His partner and three minor children are the income beneficiaries of the trust. When farmer Brown dies, the Trustee invests the $1m in various investments yielding 5.5% per annum. In the first year, the Trustee allocates just over $18,000 to each child. There is no tax payable on these distributions because the child is taxed as an adult and is therefore below the tax threshold. If we assume a tax rate of 31.5% for his partner, then the tax saving in just one year is $17,325. 

And just for good measure, where a beneficiary's relationship has broken down, a Will Trust inheritance will clearly show different contributions during the relationship and may reduce the financial obligation in a property settlement. 

If you would like more information, call Bill Beard on 5330 5800 or email [email protected].

This page has been prepared by RSM Financial Services Australia Pty Ltd ABN 22 009 176 354, AFS Licence No. 238282.

As everyone's circumstances are different and this article doesn't take into account your personal situation, it is important that you consider the above in light of your financial situation, needs and objectives, and seek financial advice before implementing a strategy.    
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