A Will ensures that a person’s assets will be smoothly passed onto his or her chosen beneficiaries, after passing away. While a simple Will is an essential component to the estate planning process, sophisticated plans should also include the use of one or more trusts. A trust is a relationship whereby one person holds assets on behalf of another person.
This article outlines the four most common trusts included in a Will, coupled with their defining characteristics and benefits.
- Testamentary discretionary trusts
A testamentary discretionary trust is one where, upon the death of the Will-maker, the assets are not distributed to the beneficiaries absolutely. A testamentary trust is usually used for asset protection and taxation benefits.
The beneficiaries do not legally own the assets of the trust and the trustee has the discretion to distribute capital and income of the estate in the same, or differing proportions, between a group of beneficiaries nominated in the Will.
This type of trust is useful if the estate is substantial and the Will-maker wants to implement a method of managing the capital of the estate for the collective and individual benefit of multiple successors. They can also be used to protect vulnerable beneficiaries such as children, the disabled, or those with other difficulties.
- Protective trust
A protective trust is usually included if there is concern that a beneficiary may be unable, or have difficulties, with managing his or her inheritance.
When there is a protective trust in place, the trustee has the power to use the income and capital of the trust for the ongoing benefit of the beneficiary for a variety of approved purposes, as specified in the Will. Upon the death of the beneficiary with additional needs, the capital remaining in the protective trust is transferred to other nominated beneficiaries. If so desired by the Will-maker, the beneficiary may become entitled to the capital of the trust on meeting conditions specified in the Will.
- Life interest
A major advantage of a life interest trust is that the Will-maker can elect someone to receive the benefit of their assets during their lifetime (life tenant), and then upon their death, nominate who should receive the asset outright (remainder). It is usually used in second/subsequent marriages, or for beneficiaries living with a disability, or family members facing hardship.
For example, if a life interest trust is included in the Will, and the Will-maker’s home is placed into this trust, then the person with a life interest could continue to live in the property (or another property purchased from sale proceeds of the original property) for the rest of their life. On their death, it is distributed in line with the terms of the Will. A life estate may be created in real estate property or in personal property.
- Special disability trust (SDT)
This trust allows a Will-maker to provide for family members living with a severe disability, without impacting social security benefits. The trust can pay for reasonable care, accommodation and other discretionary needs of the beneficiary during their lifetime.
For a special disability trust to be established, the beneficiary must meet the definition of ‘severe disability’ which is assessed by Centrelink.
The key benefits of this type of trust include:
- Can be established with assets up to $694,000, for severe disability without affecting social security benefits.
- If it holds a property used as the main residence of the beneficiary, the value of that property is excluded from assets and income test requirements.
- Income from the trust, whether expended or unexpended, is taxed at the beneficiary’s marginal tax rate.
- Assets which are gifted into the trust will not cause the donor of the asset to be subject to Capital Gains Tax.
- Disposal of a dwelling owned by this type of trust, and used by the beneficiary as their main residence, is included under the Capital Gains Tax main residence exemption rules.
- Eligible family members who gift assets up to $500,000 to the trust (in total) may receive an exemption from the usual Centrelink gifting rules. This may help to increase their own entitlement to Centrelink.
Estate planning is a complex process that requires professional oversight, in order to ensure that loved ones are cared for if the Will is enacted. A Trust can go a long way in effectively carrying out your wishes.
If you would like to set up a Trust as part of your Will, or draft a Will, please contact Vesna Pocuca at our Castlemaine office on 03 5472 1588 or Trent McGregor at our Bendigo office on 03 5434 6666.