Three benefits of using a trust for your estate planning

Establishing a testamentary trust as part of your estate plan can bring numerous benefits - from protecting assets to allowing your favourite charities to benefit long after you are gone, writes Marie Brownell, National Manager, Estate Planning, Equity Trustees.

In Australia, there are a number of different types of trust structures available to ensure your wishes are carried out after you are gone. These can suit a range of purposes, including asset protection, income tax splitting opportunities, providing for vulnerable beneficiaries, structured giving, assisting with the management of property and assets, or minimising the potential for your wishes to be disputed.

While there are many different types of trust, the most common ones include:

• discretionary trusts 
• protective trusts
• life interest trusts or capital preserved trusts
• right of occupation trusts
• special disability trusts
• charitable trusts.

A trust is essentially a fiduciary relationship in which you give another party (the trustee) authority to handle your assets for the benefit of your beneficiaries.  The trustee is responsible for the day to administration of the trust and is legally obligated to administer the trust in accordance with the terms of the trust.

A trust created in a Will is known as a testamentary trust and these trusts have become a popular estate planning option for many Australians.

It is a method of estate transfer which means that instead of the estate assets passing outright to a beneficiary, they are put into a structure from which the beneficiary receives certain entitlements as determined by the terms of the trust.
  
Here we look at some of the benefits of a testamentary trust in greater detail.

1. Greater choice and asset protection

Trusts can offer greater choice with regards to how you provide for family members. Let’s say, for example, you have a child with a gambling addiction. A trust structure offers a way to provide for your child by providing regular income and secure accommodation, rather than leaving them a lump sum that could be squandered or misused.

There are two common types of testamentary trusts which can be used for distributing assets to family members - fixed or discretionary.
 
A fixed testamentary trust is one in which the entitlements of your beneficiaries are clearly defined and cannot be amended. For example, a wife may leave her assets to be held in trust to her husband for his lifetime and, when he dies, the capital of the trust becomes distributable to her children.

A discretionary testamentary trust provides a trustee with broader discretion to distribute the trust’s income or capital to any one or more of the beneficiaries of the trust during the life of the trust. The trust must ‘vest’ (be finalised and the assets distributed) within 80 years, so your descendants could benefit from your wealth for years to come.
 
Because beneficiaries of a discretionary testamentary trust do not have any fixed entitlements, this type of trust offers a layer of asset protection for bankrupt beneficiaries and those who may become involved in personal and business disputes.

2. Income splitting opportunities

A discretionary testamentary trust not only offers asset protection for the discretionary beneficiaries, it can also offer income tax splitting opportunities.  Let’s take Jack for example, who leaves his whole estate to his daughter Denise who earns $80,000 a year and has two young children. In the first year after Jack’s death, Denise receives income of $50,000 from the investments and will pay her marginal tax rate on the income earned from those investments.

If Jack had established a discretionary testamentary trust in his will, the trustee could have distributed the $50,000 in that first year equally between Denise’s two children – for example, for their education, medical and living expenses. Each child would have received $25,000 income.  As each child would be taxed as an adult, the tax savings would be significant because each child is entitled to the tax-free threshold of $18,200.

It’s important to note that children receiving income from a testamentary trust are taxed at adult rates, as opposed to special rates of tax from non-testamentary trusts, which have a tax-free threshold of just $416.

3. The ability to structure your giving

Testamentary trusts can also take the form of a charitable trust.  These trust structures can be a great way to ensure a planned approach to your philanthropic donations.
 
With regular payments from your trust’s income, the charity of your choice could receive annual payments long after you are gone.  Unlike other types of trust which must come to an end within 80 years, charitable trusts can exist forever.
  
Charitable trusts may also be used to establish giving during your lifetime. A Private Ancillary Fund (PAF), for example, is a popular vehicle for people who want to see the charities or charitable purposes of their choice receive funds while they are alive and continue to benefit after their death.
  
This type of structured giving provides an opportunity to engage your children and grandchildren to discuss family values, what to give, and for what charitable purposes and agree on how your philanthropy will make a difference over multiple generations.

Summary

Using a trust structure as part of your estate plan can bring a range of benefits. Get advice from a specialist in estate planning on whether a trust could suit your family’s needs and goals.

More information about Equity Trustees’ wills and estate planning services is available on our website.

This article was originally published in Starts at 60 in August 2021

1. ABS census 2016