Instead they pass control of the assets to their family.
Why does it matter? It matters for two reasons – tax minimisation and asset protection.
If you leave assets – whether real estate, shares or cash – to family members, it will hopefully generate income for them. However, each year, that income will be added to their other personal income, and may be taxed at a high marginal tax rate.
What if, instead, you could give that family member the flexibility to distribute the income from their inheritance to the lowest-earning member of their family? You can do that – by giving it to them in a testamentary trust.
Even better, the tax legislation grants a special tax concession for children. Usually, passive income going to minors (children up to 18) is taxed at a penalty rate of up to 66%, but income from a testamentary trust is treated as “excepted trust income”. Minor children (and grandchildren and great-grandchildren) get adult marginal tax rates – a significant saving. A 3-month old baby can receive $18,200 per annum tax free, and reduced rates above that.
Testamentary trusts also protect the family assets. Although the spouse or child will control the assets, because they don’t actually own them, the assets are quarantined from personal debt. If the family member becomes bankrupt, the inheritance is not exposed.
With tweaks, such as appointing an additional trustee, testamentary trusts can be used to protect family members with a weakness for spending, or who might be easily influenced by unscrupulous outsiders.
Your will can establish as many testamentary trusts as you wish – a single trust for the whole family, or a separate trust for the spouse, each child, and even grandchild.
If desired, testamentary trusts can last multiple generations, with your legacy benefiting not just your spouse and children, but your grandchildren too. The trusts will, of course, only come into existence on your death.
So why doesn’t everyone have a testamentary trust will? They come at a cost, both financial and administrative. Aside from the initial cost of preparing the will, the trust creates the need for an extra tax return each year. For small estates, this extra cost is not justified.
How much do you need to leave for a testamentary trust will to be worthwhile? We typically recommend they be considered for estates worth $1 million and upwards, but sometimes they are worth considering for smaller estates, such as where there is a child who needs special protection.