Every estate planning conversation includes a discussion about Testamentary Trusts. They can assist with asset protection and management, and taxation efficiency.
However, recent legislative changes in this space means Testamentary Trusts don’t have all of the same advantages as they previously did.
So what is a Testamentary Trust?
A Testamentary Trust is a discretionary trust created by a Will on a person’s death.
Testamentary Trusts have many benefits which include allowing assets to remain in a single entity for generations, establishment of rules around ownership and management, and entitlements to income.
Why are Testamentary Trusts useful?
One useful aspect of Testamentary Trusts is that they allow distribution of income to minor beneficiaries (under 18 years) who receive a concessional tax benefit. This means that minor beneficiaries who earned no other income could receive a distribution from a Testamentary Trust of $18,200 – tax free.
What are the changes?
New Commonwealth laws recently passed restrict the way in which concessional tax rates will be applied to income derived from assets that are transferred to Testamentary Trusts.
The changes apply retrospectively with effect from 1 July 2019.
Under new rules, concessional rates will only be applied to income (such as interest earned on cash or rental income) derived from:
- property transferred into the testamentary trust under a Will, codicil, a Court order or intestacy; or
- from the proceeds or investment arising from property transferred from the deceased estate.
Income which is generated from property unrelated to the deceased estate and injected into the testamentary trust after 1 July 2019, or income generated from the disposal of these assets from this date will not receive any tax concessions for minors.
Below is a table demonstrating the tax implications of the changes:
|Before the changes||After the changes|
|Asset injected into a Testamentary Trust not directly from a deceased estate||$60,000 cash||$60,000 cash|
|The beneficiaries of the Trust are Peter and his 2 minor children||$60,000 is distributed between Peter and his 2 children||$60,000 is distributed between Peter and his 2 children|
|If Peter and his 2 children earn no other income – the tax payable||Approx. $1,026||Approx. $19,780|
As Testamentary Trusts can exist for up to 80 years, these new rules render them less beneficial in the treatment of income to minors. Benefits still remain for income from assets received from the deceased estate. But what about superannuation assets and after acquired assets?
Testamentary Trusts will still feature heavily in estate planning. And there are many good reasons to establish Testamentary Trusts.
But, taxation aspects have become more complex and restricted in ways which can affect future generations.
If you need assistance with your estate planning, please contact Kimi Shah.