Testamentary trusts
Concerned that your estate will be eaten by taxes instead of going to your loved ones? Will your relatives face large capital gains if they inherit your property or assets? Here we look at a tax-effective vehicle to distribute your assets – a testamentary trust.
Capital Gains Tax (CGT) is a key concern for anyone inheriting assets from a Will, but the tax incurred can depend on the type of asset, when it was originally acquired and how quickly it is sold.
For example, a family home left to adult children is CGT exempt if sold within two years after the owner’s death but after this time, CGT may be applied at the full rate for the whole period. Confusing and complex to say the least!
A testamentary trust can help alleviate these tax issues and also has the added benefit of offering ongoing protection of the assets you have worked so hard to build up.
How does a testamentary
trust work?
A testamentary trust is set up through your Will but does
not come into effect until after you pass away. It is a
legal agreement under which your assets are held by a trustee.
The trustee (who is usually also a beneficiary) can distribute your funds or assets to the other beneficiaries as they see fit to generate tax savings or protect the estate. However, the trustee is legally bound to act in the best interests of the beneficiaries.
Why a trust? Why not just
pass my assets down?
Firstly, a testamentary trust can be very tax-effective,
which means the life of the estate is prolonged. This is
particularly so if you have a number of children or grandchildren
in the family.
Children who are beneficiaries of a testamentary trust also have access to normal adult tax rates including the tax-free threshold, rather than the higher child tax rates.
Also, the trustee can choose to distribute tax effectively – for example to those beneficiaries on lower marginal tax rates such as a stay at home parent (who pays no or little income tax) rather than their working spouse.
Secondly, a testamentary trust can work to protect assets. As the assets of a testamentary trust are not ‘owned’ by the beneficiaries but rather the trust itself, the assets are better protected against claims by creditors.
If the beneficiaries are individually targeted or are faced with bankruptcy, the trust is generally protected. This can be particularly effective if you have adult children who are in business with debts, have marital problems, or are simply spendthrifts.
In the case of a beneficiary who is likely to squander their inheritance too quickly, the trustee can restrict that person’s ability to use the capital or income of their share of the estate. This way it can be reserved for others such as grandchildren.
Carefully choosing a trustee is important, as they will have discretion over the trust’s funds and assets. Not only does the trustee need to consider the deceased’s wishes, but also ensure that the long-term needs of the dependents are met.
A testamentary trust is only one option to help you plan your estate tax-effectively. Speak to your Count adviser about different options that will help you carry out your wishes, preserve your estate and provide for your beneficiaries after you are gone.
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As at
24 August, 2006 Doc Owner: MKT |
