The Power of Testamentary Trusts: Safeguarding Your Legacy

There’s no doubt that with estate planning comes a web of legal terms and jargon that can be overwhelming for the average person. Among these, phrases like 'will trust,' 'testamentary trust' (TT), and 'testamentary discretionary trust' (TDT) may seem complex, but they all point to a powerful mechanism established within a will. This dormant entity, activated only after the willmaker's passing, holds the potential to redefine how we secure our family's future.

Understanding Trust Dynamics

At its core, a testamentary trust operates by separating control of assets from their benefits. The trustee assumes the responsibility of making decisions, while the beneficiaries enjoy the fruits of the trust. This structure closely resembles a family trust, designed to manage and protect various investments, acting as a separate entity from the individual.

Why Should You Care?

For the average person, the relevance of testamentary trusts becomes apparent when considering the increasing value of homes, accumulating superannuation, and default insurance amounts. When these assets surpass the $500k threshold, it's time to consider integrating this structure into your will.

Safeguarding Against Risks

One of the primary motivations for utilising a testamentary trust is to shield your inheritance from potential divorce and bankruptcy risks. In the event of re-partnering after the death of a spouse, a will trust becomes a crucial tool to protect the children's inheritance from the influence of the surviving spouse or new partner.

Control Over Distribution

In scenarios where both spouses pass away simultaneously, a testamentary trust provides a safeguard against the automatic distribution of a large lump sum to children at the age of 18 or 21. Instead, the trustee can monitor financial maturity and allocate resources accordingly, ensuring a more responsible and beneficial use of the assets.

Longevity and Generational Wealth

Unlike other structures, a testamentary trust can endure for up to 80 years, benefiting not just children but also grandchildren. This longevity ensures the sustained protection and growth of family wealth over multiple generations, creating a legacy that lasts beyond a single lifetime.

Tax Benefits Through Strategic Income Splitting

Another advantage of testamentary trusts lies in potential tax savings through income splitting. A special rule allows beneficiaries under 18 to access the tax-free threshold of approximately $18k, a benefit not available with family trusts established during the willmaker's lifetime or by beneficiaries after receiving their inheritance. This can be particularly useful for covering education expenses with tax-free income.

The Power of Foresight

In essence, the benefits of testamentary trusts are derived from the foresight of the willmaker. By strategically incorporating this structure into your estate plan, you not only protect your assets from unforeseen risks but also ensure the financial wellbeing of your loved ones for generations to come. Testamentary trusts aren't just legal jargon; they are a testament to the thoughtful planning that shapes the future.

If you have any questions and you’d like to chat to the YMD team, don’t hesitate to reach out.