A testamentary trust is a trust made by a will. It is generally a discretionary trust – one where the Trustee has complete discretion about who benefits, and to what extent, underneath the trust.  A testamentary trust has two important advantages for a will maker and the nominated beneficiaries:

– Substantial taxation advantages in relation to income splitting; and
– Protection from any financial or other issues the beneficiaries may endure

Income splitting

– With a trust, taxable income between $6,000 and $20,000 will be taxed at the low rate of 17%.
-Imputation credits attaching to franked dividends received can be efficiently used by the child.
–The chief benefit of employing a discretionary, testamentary trust for assets that are bequeathed is that any income gains, capital gains and franked dividends could be distributed in the most tax-saving method among all the household beneficiaries each year.
–The tax concessions do not apply solely to income and capital gains derived by the trust from inherited assets.

Asset protection

Many clients are concerned about protecting their assets. They want to make sure that the assets remain inside the family and are used to benefit family members.

Specifically, clients are concerned about:

–their beneficiaries becoming bankrupt, particularly those who are involved in businesses that are highly leveraged;
–their beneficiaries becoming divorced and their assets being separate in the divorce;
–spendthrift children;
–ensuring the remaining spouse will pass on their assets to their own kids upon that person’s departure; or
–looking after handicapped children.
The significant advantage of a testamentary trust is that the assets are possessed by one person(s), the trustee, along with the benefit of the income and capital of the trust passes to another person/s, the beneficiaries.

This separation of advantage and control allows testamentary trusts to protect assets from any legal action involving the beneficiaries or misuse of those assets.  These terms can restrict the power of any of the beneficiaries give them complete control or to control investments and the activities of the trust.