I’m always talking about how valuable testamentary trusts are, but does that mean every person should include one in their will? Not always. Check out my VLOG about when it’s okay NOT to use a testamentary trust in your will.

And I’ve shared some links to my previous posts if you want to find out more about:

 

Video transcript

Hi there it’s Tara Lucke here.

I thought I would do a slightly different video this time because I’m always going on about how valuable and important testamentary trusts are, but there are situations where a testamentary trust is not going to be the best solution for someone’s estate plan.

So I wanted to talk through my consideration of the factors when a testamentary trust will not be appropriate and when a standard “I love you” will should be utilized.

So when I’m talking about an “I love you will” (and sometimes it’s an “I hate you will”) – basically that’s a will where you just leave assets outright to a particular beneficiary.

There’s no trust structure. They inherit the asset. It becomes their asset. It becomes exposed to any claims against them whether they’re from bankruptcy or a divorce or family law proceedings, and if they invest the inheritance and generate an income from that investment, any income gets taxed at the maginal rate.

So the “I love you will” is basically what a lot of people think of when they’re thinking about making a will.

So when is a non testamentary trust or an “i love you” will going to be appropriate?

I go through this in my course, the Art of Estate Planning and basically, there’s about five different factors where a testamentary trust is not going to be appropriate.

Firstly, where the assets passing under the will to a beneficiary is not going to be large enough to justify a testamentary trust.

So there’s no rule about how much wealth needs to pass into a testamentary trust.

But in order to access those amazing asset protection and tax saving advantages of the testamentary trust, you probably need to have around $500,000 of wealth going into the trust before those advantages really justify the additional administration costs of the trust.

Now I’ve done other posts about the administration costs of a trust.

They’re really not that much, but if you’re going to receive an inheritance from somebody and for instance, just use it to pay off your mortgage or you know, pay for holidays, it’s a couple hundred thousand dollars and that’s about it, you may not find the advantage of it going into a testamentary trust is going to be worth an extra tax return.

The other reason where you may not use a testamentary trust is if there are no minors around.

Testamentary trusts are amazing for allowing access to tax free income of the earnings of investing an inheritance to pass to minors.

Generally without a testamentary trust minors get taxed at a really high marginal rate on any income they earn above, you know, $450 roughly, so that amount is adjusted over time, so anything above the $400 or $500 every year is taxed at penalty rates if it’s distributed or allocated to a minor.

But the government recognizes with testamentary trusts that somebody died for those assets to go into the trust, so they give minors a tax concession.

Now if there are no minors around to access those tax concessions and all income is just going to go into the beneficiary’s name anyway, they may not find any benefit in using a testamentary trust.

That said, we need to have a little bit of forward planning, so if there’s no minors at the date of death or at the date when preparing the will, but there might be in the future, you know, if you’re dealing with young adults, then you still need to think about what family considerations there would be at that time.

Asset protection is another reason for using a testamentary trust.

If there are no asset protection considerations – so no one is running a business or in a high risk occupation and there’s no family law risks now or in the future, again, you may not find any benefit in using a testamentary trust.

If the beneficiary can manage their inheritance properly and there’s no issues about us needing to “rule from the grave” and put in control structures to protect the inheritance from a beneficiary’ mismanagement, then you may not need a testamentary trust.

And lastly, if you’ve got a beneficiary who, or a recipient of an inheritance who lives overseas who has no connection with Australia, is not going to have any connection with Australia and the assets will simply be liquidated and distributed to them then maybe leaving them with their inheritance in a testamentary trust is not going to do them any favors and they would be better off just cutting and running with that inheritance.

Overseas beneficiaries is a pretty tricky area. Sometimes testamentary trusts can be an excellent planning tool to avoid triggering tax or cgt event K3.

So real consideration needs to be given to that last point about overseas beneficiaries.

So, a testamentary trust is not always going to be the default option.

You do need to make sure that the advantages of a testamentary trust are going to be there.

If you’re in my course, the Art of Estate Planning, you’ll see that I’ve got some really handy fact sheets and decision making tools to help you reach these conclusions, but generally speaking, it’s always worth looking at the advantages of a testamentary trust, identifying whether those are going to be available or of use to an intended beneficiary of an estate, both at the time of making the will and in the future before just lumping someone with a testamentary trust.

That said, my experience is that 9 out of 10 beneficiaries will receive tremendous value from receiving their inheritance in a testamentary trust.

Now if you’ve got any questions, please feel free to get in touch.

I’m always happy to take a look at a situation or answer any questions. Thanks for watching

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