Why A Will On Its Own, Is Not Enough To Secure Your Wealth

Increasing numbers of Australians are waking up to the benefits of ‘testamentary trusts’ when drawing up their wills. As well as offering potential tax benefits, such trusts can protect the inheritance you pass on to your children, long after you are gone. DGI Founder and CEO Dominique Grubisa explains more.

Most of us think we are taking care of our children and other beneficiaries when we sit down and complete a will and testament. We look at the assets we have, write down who should get what, and then sit back, expecting everything to run smoothly once we are gone.

The problem is that life can get messy.

What happens, for example, if soon after you die your son gets a divorce, and his now ex-wife walks away with half of the inheritance you left him? Or if the hundreds of thousands of dollars you left your daughter are lost when one of her business deals goes bad and she is forced in bankruptcy. What about if much of the inheritance you are passing on is gobbled up by taxes, because your beneficiaries are in high tax brackets?

This is where testamentary trusts can be invaluable. This increasingly popular form of estate planning allows individuals to manage the future distribution of their assets in ways that can be both potentially tax effective for their beneficiaries and provide significant asset protection.

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Maximum benefit for beneficiaries

So how does a testamentary trust work?

With a regular will and testament, after probate is completed the executor distributes the various assets in the estate directly to the beneficiaries according to the deceased person’s instructions.

Where someone has made provision for a testamentary trust in their will, the procedure is different. Rather than being directly distributed, the assets are held in trust, with a trustee overseeing their management. The trustee is then able to distribute the assets in a manner and according to a timeframe that brings maximum benefits to the beneficiaries. Unlike assets held directly by the beneficiaries, funds that remain in the trust don’t form part of an individual’s tax liability and aren’t generally able to be accessed through litigation. Obviously, choosing a reliable and competent trustee is essential.

Here are five key scenarios where the provisions of a testamentary trust could help you and your beneficiaries:

1. Tax advantages: Tax effectiveness is one of the key uses of a testamentary trust. If a beneficiary of a will is a high-income earner and any assets they receive will be taxed at the highest marginal rate, the trustee may opt to distribute the assets to a family member of the beneficiary, such as a wife or child, who is in a lower tax bracket. In this way, the overall tax that the beneficiary’s family pays on the assets may be reduced or even eliminated.

2. Family crisis management: Remember the scenario above where a divorce robs your son of his inheritance. Funds held in a testamentary trust aren’t considered as belonging to any one individual, meaning the Family Court can’t order that they be shared in the case of a divorce. Once his divorce is finalised, your son might work with the trustee to have his full inheritance released to him.

3. Inheritance protection: We’ve all heard stories about young adults wasting large inheritances due to their lack of maturity. With a testamentary trust, the trustee can be given instructions to delay handing over an inheritance until the recipient is ready to manage it responsibly.

4. Child protection: A grandparent may wish to leave money for a young child’s education or some other special purpose, but not feel confident handing it directly to the child’s parent. A testamentary trust allows money to be put aside until it’s time for the child’s school fees or other bills to be paid.

5. Inheritance equalisation: Sometimes money outside the main estate forms part of an inheritance. For example, any leftover superannuation is likely to be paid to your dependents. If your desire is for beneficiaries to be paid the same amount, the trustee can take these outside payments into account when dividing up your estate.

So, don’t rely on a basic will to manage the distribution of your assets following your death. By making provisions for a testamentary trust, you can give your children and other beneficiaries the best possible chance of enjoying – and holding onto – the inheritance you leave them.

To learn more about a testamentary trust, book a free appointment with DGI’s asset protection specialists.

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DOMINIQUE GRUBISA

Lawyer, Asset Protection Specialist and Property Educator

Dominique Grubisa is a practising legal practitioner with over 22 years of legal and commercial experience. She is a property investor and developer, an entrepreneur with businesses in Australia and Southeast Asia, a speaker, educator, writer and published author. You may contact Dominique at info@dginstitute.com.au

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This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.