In a financial planner’s office, there’s not a week that goes by without a dark secret being revealed. An old flame that’s suddenly reappeared, the daughter that needs a loan or the real feelings about the son’s new partner.
The nub of the discussion is often centred on how to protect the family fortune that took years to accumulate from disappearing into someone else’s pocket.
Working closely with our colleagues in the legal profession, the tools available are powerful and varied. The spin-off benefits could see your family fortune funding your great-grand-daughter’s education at Penrhos, with much of it tax free.
At the heart of the arrangement is a special vehicle known as a testamentary trust. It’s a trust that sits dormant until you die and like a phoenix that springs from the ashes (perhaps an unfortunate analogy), the trust is activated when probate is granted.
The will is beefed up with a trust deed, which is a set of written rules that explain how the trust will operate. It usually adds several pages to the thickness of the document.
The deed sets out what things the trust can do, the forms of investment it can make and, importantly, who the players are. These will invariably include the beneficiaries of your estate and using this approach, the list of beneficiaries can be as broad or as narrow as you want it to be.
It could, for example, simply name “all of my grandchildren and their descendants”, bypassing your children and their spouses.
The deed will also need to set out who the boss or trustee of the trust is and, again, this might be your child, a sibling or others. Importantly, the trustee’s legal duty is to act for the listed beneficiaries — and no one else. The trustee might also be given discretionary powers to distribute to the beneficiaries as they see fit.
That discretionary power means they can make distributions of income or capital from the trust as required.
The last aspect concerns taxation. While one attractive aspect of self-managed super funds might be their use as a type of estate planning tax tool, the humble testamentary trust shouldn’t be ignored.
Minors (or kids under 18) who receive distributions from these trusts are taxed at the same rate as adults. They could receive $18,200 tax free from the estate per annum. Much better than the $416 per annum they are normally permitted, $18,200 might go some way to paying for the school fees or, at the very least, those riding lessons.
The costs of a will incorporating a testamentary trust aren’t insignificant and they won’t be part of the free will kit that turned up with your funeral insurance policy.
Essentially, they are a trust deed and a will combined in the one document. Costs will vary, but typically they sit around the $2500 mark. It’s a big outlay for a will but consider it an insurance policy to ensure your family fortune doesn’t end up with the in-laws or in the pockets of a spendthrift child.