Published in the Coffs Coast Advocate on 28 March 2015.
Jim is single and has two children. He has accumulated substantial assets including real estate and a large self-managed superannuation fund.
Jim consults a solicitor regarding the drafting of his will and his estate planning in general.
The solicitor examines Jim’s financial circumstances and takes further instructions regarding his children’s stations in life.
Jim’s solicitor discovers that Jim’s daughter is in a “rocky relationship” and that Jim’s son owns a struggling small business.
The solicitor advises Jim to consider establishing a testamentary trust under his will. A testamentary trust commonly refers to a structure that arises upon death, whereby the assets of the deceased are held by a “trustee” who has the discretion to distribute these assets to a range of beneficiaries as the trustee deems fit.
The effect of a testamentary trust is that the beneficiaries’ inheritance is held by a third party. This means that the assets are not technically considered to be assets of the beneficiaries, which can be useful in terms of asset protection.
If, for example, after Jim’s death, his daughter’s marriage breaks down and her husband makes a family law claim against her inheritance, it is possible for her to argue that the funds are not her assets. The funds may nonetheless be taken into account as a “financial resource”, but having the funds held in a testamentary trust can protect the assets themselves from attack.
Similarly, if after Jim’s death, his son’s business was to fail, the assets of the testamentary trust may be protected from claims by creditors or a trustee in bankruptcy.
A testamentary trust can also have tax benefits, allowing income of the trust to be distributed to Jim’s grandchildren in a way that allows each of them to receive the full $18,200 tax free threshold rather than the smaller amount of $416 which applies to other trusts.
Jim decides to put in place a will that creates a testamentary trust.
It is important that he appoints an independent executor and trustee and Jim appoints his younger brother to fulfil this role.
Jim also makes a binding death benefit nomination directing that upon his death, the balance of his self-managed superfund is paid into the testamentary trust.
