Opening a Testamentary Trust per the Will

29.1.1 Overview
29.1.2 Benefits of a Testamentary Trust

29.1.1 Overview

A testamentary trust is a separate entity for tax purposes in Australia, similar to a person or a company, and can own and hold assets such as cash, real estate, land, shares etc., can invest and can operate businesses. A testamentary trust can be in place for up to 80 years but can be wound-up earlier.

It needs to be understood that a testamentary trust is only viable if the value of the Deceased Estate is large enough to justify the additional costs. For simple Estates, this may not be the best option unless it is a requirement under the Will. You should seek appropriate advice to determine what is best suited to your specific circumstances.

A trust has several key roles with specific responsibilities as outlined below:

Settlor

For trusts that are set-up as a requirement under a Will, the settlor is the deceased person who instructed that a trust be created and provides all the assets that will be managed in trust for the benefit of the nominated Beneficiaries as per the Will.

Trustee

A trustee is the person or company who holds the property in trust for the Beneficiaries, hence holds legal title of the assets within. There may be one or more trustees appointed. The trustee(s) are responsible to manage the trust as per state/territory legislation as well as the general administration and tax payments.

A trustee has fiduciary duties and is personally liable for any debts administered as part of the trust.

Beneficiary

A beneficiary of a trust is not the same as a Beneficiary of a Deceased Estate but shares the same name due to the underlying concept of being a person who has an entitlement by the Will or law to receive.

A trust beneficiary can be a person, trustee of another trust or a company. The trust beneficiary can also be the trustee for that same trust so long as there are other beneficiaries or multiple trustees. For Deceased Estates that require a trust, one of the Beneficiaries can be appointed as the Trustee.

A trust beneficiary will have to pay income and other relevant taxes based on their share in the trust.

29.1.2 Benefits of a Testamentary Trust

Testamentary trusts have many advantages depending on the deceased person's financial and family situation and can provide a great deal of flexibility and control if set-up correctly. This allows the deceased person to make provisions for Beneficiaries that are not part of the immediate family or are still under the age of 18.

Let's assume the deceased person had children and grandchildren under the age of 18, who cannot inherit money or assets due to being underage. The deceased person wants to make provisions for his children but also his young grandchildren to pay for school fees. A testamentary trust allows for assets to be held in a trust that become fully accessible to the grandchildren once they have reached the age of 18 or another determined age. The parents of the grandchildren can access the trust funds as the deceased person's grandchildren start high school. A trust has many more applications that can be discussed with simplyEstate's Trusted Partners.

Another benefit of a testamentary trust is that Beneficiaries can further distribute some of their inheritance to their children. A testamentary trust allows income that is generated from the Deceased Estate assets, like an investment property, to be distributed to multiple people such as the children of the Estate Beneficiaries, meaning the grandchildren of the deceased person. Children under the age of 18 will be taxed as outlined on the ATO website.

Further benefits of using a trust may be:

• equal distribution of the Deceased Estate even if early inheritance amounts, superannuation or life insurances were paid out as required by law;
• all assets are owned by the trust and not the Beneficiaries;
• assets held in a trust are protected in case a Beneficiary divorces;
• retain the assets within the family even if the deceased person's spouse remarries or enters a de facto relationship at a later stage protects assets from possible bankruptcy in case a Beneficiary is or will be in a difficult financial situation;
• protect assets from claims made against a Beneficiary who is in a high-risk profession that may be personally liable;
• provision for Beneficiaries who are under the age of 18;
• provision for Beneficiaries with an illness or disability;
• provision for Beneficiaries who manage money poorly; and
• protect assets of a business.

Setting-up and maintaining a trust will incur costs of which some include:

• legal fees for set-up anywhere between $1,500 – $10,000 or more;
• ongoing bank account fees;
• annual review fees; and
• ongoing accounting and taxation advice and administration fees.

Given the significant costs, you will need to establish which Deceased Estate assets will make up the trust and if the benefits outweigh the costs to justify the establishment of a trust. You should discuss this option with the Beneficiaries unless the creation of a trust is set out as a requirement under the deceased person's Will.

If the deceased person's Will requires the establishment of a testamentary trust after the death of the testator (deceased person), you will need to follow these common steps (other tasks may be required in addition depending on your situation and requirements):

• Review the Will for a testamentary trust, or draft the deed outlining the instructions and distribution of the Estate through the trust;
• determine the trust's address;
• Apply for a Deceased Estate Tax File Number (TFN) with the Australian Business Register by following the steps online here;
• Apply for an Australian Business Number (ABN) with the Australian Business Register by following the steps online here;
• Register for GST if the trust revenues exceed $75,000 annually; and
• open a trust bank account.

Review the Will to determine which assets will be transferred to the trust or where this is not defined, decide with a tax accountant and the Beneficiaries which assets to bring in.

If the deceased person didn't have a Will or didn't mention a testamentary trust in the Will, the Beneficiaries may still decide that a trust would benefit them.

You will need to remember that a post-death testamentary trust:

• must be established within three years from the date of death as outlined in Step 29.3 above;
• can only appoint the spouse and children of the deceased person as Beneficiaries;
• does not provide the same level of flexibility and protection of assets as a testamentary trust set-up as part of the Will. This means that the Beneficiaries are entitled to the assets in the trust and once children of the deceased person turn 18 years of age could wind-up the trust and transfer their assets out, hence diminishing possible tax benefits; and
• Cannot hold assets worth more than the Beneficiaries of the trust would have received by law if the deceased person died Intestate, that is without a Will.

To understand how much Beneficiaries may likely receive by law, refer to Step 34 – Finalisation & Distribution of Estate to Beneficiaries and return to this Step to determine if a post-death testamentary trust is something you should discuss further with one of simplyEstate's Trusted Partners listed on the right or below.

After having set-up a trust, you will need to maintain it for its duration. This will include:

• maintain a record of all assets held by the trust;
• maintaining and paying for bank accounts;
• prepare financial statements at least annually;
• complete income tax returns;
• meet at least once a year with the trustees and Beneficiaries to review the trust;
• record all decisions that are made for the trust; and
• comply with all legislative requirements.

If the Trustee is well organised and know how to maintain a trust, the general administration and lodging of tax returns can be done by the Trustee. Alternatively, we recommend seeking advice from a tax accountant to assist or take on the trust administration and maintenance.

Note: As tax laws change frequently it is a good idea to seek advice every year or at least every few years to ensure you are complying with the latest regulations.