Using Testamentary Trusts in Estate Planning

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Wills using testamentary trusts are the starting point for most estate planning endeavours. They can ensure that wealth will pass to the intended beneficiaries in the right amount at the right time.

Testamentary trusts are also relevant when implementing a strategy to protect assets. As Will and Estate lawyers at North Sydney, we recommend that the Will-maker incorporate a testamentary trust wherever relevant. However, the question often becomes, how to set up a testamentary trust after death has occurred?

You see, the problem is that all too frequently a serious attempt to put together a good estate plan is not made until financial misfortune or life-threatening illness has already struck. By then, the options available are all too few. Researching setting up a trust in advance of this happening is the smartest play.



What is a testamentary trust (Australia)?

Testamentary trust definition: A testamentary trust is a type of trust created in the event of your death. It’s usually laid out in a person’s Last Will and Testament; hence the name. Testamentary trusts protect and hold assets outlined in the Will, which are eventually distributed to the trust’s beneficiaries by the trustee.

Why do I need a testamentary trust?

As testamentary trust lawyers in Sydney, we can tell you that the intestacy laws provide that if you don’t have a Will, then your estate goes to your spouse (including de facto) if there are no children. If you have a spouse and one child, then $150,000 goes to your spouse with the rest being split between your spouse and your child equally. Your spouse gets one third of the rest if there is more than 1 child and in that case, the children share the balance equally between them.

If you have no surviving spouse and have children, the children receive between themselves an equal share once they turn 18. If you have no spouse and no children, then your parents get your estate (equally between them). If you have no parents, then it goes to your siblings equally.

The above arrangements obviously do not suit everyone. This is why someone might want to know how to set up a testamentary trust after death – aka a post-death testamentary trust.

Estate Proceeds Trust

We can fix the problem of not having a Will by establishing an estate proceeds trust after the death of the deceased. It is a great way to get advantageous income tax treatment for income allocated to minor beneficiaries.

One limitation on estate proceeds trusts is that the persons who are under 18 at the time it is set up must be the people who receive the trust assets when the trust comes to an end. In addition, estate proceeds trusts must be set up within 3 years of the date of death.

We can draft the estate proceeds trust so that concessional tax treatment of income distributed from the trust is available, and so that trust income is split between the beneficiaries depending on the financial circumstances and needs of the children of the deceased.

Income received by a child will be taxed at the adult rate and not at the penal rate that usually applies to the usual trust distributions to infant children.

This means that, after rebates are taken into account, each child can receive more than $20,000 tax free income in each financial year. This money can be used to pay for the child’s education, living and other expenses.

In addition, assets in excess of what the Will-maker’s children might have received on an intestacy can be contributed to the estate proceeds trust – although income generated from these additional assets will not receive concessional rates of tax.

Superannuation Proceeds Trusts

These are usually set up in a Will to capture a superannuation death benefit where the beneficiary is the legal personal representative of the deceased.

If there are surviving death benefit dependants (for example, a spouse or former spouse, children under 18 years, someone “interdependent” with the deceased or someone “financially dependent” on the deceased), then by using a superannuation proceeds trust, a tax free distribution of the superannuation proceeds can be achieved providing the nominated death benefit dependants receive the capital of the trust when it ends.

Post-Death Superannuation Proceeds Trust

Understanding how to set up a testamentary trust after death, like a superannuation proceeds trust, can be very helpful to surviving spouses with infant children.

Take Jean who died suddenly of a heart attack, leaving Jeanette and their three children Tom, Dick and Harry aged, 4, 7 and 9 years. He had $1m in his self-managed super fund.

His binding death benefit nomination left it all to Jeanette. She kept $300,000 and wanted to put the remaining $700,000 into a post-death superannuation proceeds trust. As Sydney superannuation proceeds trust lawyers, we were able to advise her about this.

Jeanette said that she could control the trust. She had read somewhere that income and capital distribution to the infant children could be used to pay for food, holidays, school fees and clothing and accommodation.

After rebates are taken into account each year, Jeanette said she could distribute over $20,000 to each of Tom, Dick and Harry (i.e. over $60,000) tax free under the ‘excepted trust income rules’ of the Income Tax Assessment Act 1936. Jeanette is extremely glad she contacted her lawyers regarding how to set up a testamentary trust after her husband’s death.

What is wrong with a post death Superannuation Proceeds trust?

Lots. Firstly, it is possible that the superannuation fund trustee might not have discretion to pay proceeds to a superannuation proceeds trust, either under their trust deed or indeed at law.

If the money does not pass directly from the superannuation fund into the superannuation proceeds trust, then there is a real risk that the ATO will rely on section 102AG of the Income Tax Assessment Act 1936 and not allow access to the “excepted trust income provisions”. This problem does not arise if the superannuation proceeds trust is established within the Will.

How to set up a testamentary trust after death

So, in answer to the question, how to set up a testamentary trust (after death), we can revert back to Jeanette’s case.

Jeanette’s lawyers established a post-death estate proceeds trust with the money Jeanette received tax free from Jean’s superannuation entitlement. The trust was very helpful for Jeanette as she ran her own business. Plus, the transfer of Jean’s superannuation entitlements into the estate proceeds trust enabled a legitimate way for Jeanette to protect her inheritance from creditors should Jeanette’s business fail at any time in the future.

Now you know how to set up a testamentary trust and why it’s so valuable. Contact our Wills, estates and trusts lawyers here at Owen Hodge Lawyers if you need assistance doing so.

At Owen Hodge Lawyers, we always strive to provide you with the best legal advice and guidance – no matter your issue. We specialise in a range of law matters, and have a blog that offers in-depth and comprehensive articles about more tax related issues such as taxation of trusts Australia and more.


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