Testamentary & Family Trusts
Testamentary Trusts
There are 4 main forms of testamentary trusts created in Australian Wills, ie: trusts that are:
• Beneficiary controlled and fully discretionary, designed to enhance an inheritance and give the particular primary beneficiary as much flexibility as possible;
• Capital reserved, designed to ensure that the lifetime beneficiary receives control of trust income, but not trust capital;
• Accommodation funds (or rights of occupation), designed to provide a home or other suitable accommodation for the rest of a beneficiary’s life; and
• Protective, designed to have the trust funds and the trust income managed to meet the needs of the lifetime beneficiary.
All 4 forms of testamentary trusts can operate to protect against a future bankruptcy of a beneficiary and can improve the prospect of defending a family law claim against a beneficiary. Beneficiary controlled testamentary trusts, in particular, also enable the splitting of trust income with family members and related entities, with beneficiaries under 18 qualifying for more favourable income tax rates.
Family Trusts
Family trusts, with discretionary beneficiaries drawn from a pool of existing and future family members and their related entities, first became a common feature of the Australian business and investment landscape in the 1970s.
Many family trusts are holding assets that have appreciated significantly and the transfer of assets out of a family trust will trigger either a taxable CGT event or (if acquired before 20 September 1985) become subject to capital gains tax going forward.
Unlike other structures, family trusts are controlled, rather than owned and thus have often had a key role in asset protection for their primary beneficiaries. In most states and territories, family trusts can last for up to 80 years and so often outlive their 1st generation primary beneficiaries.
As a result the future (and frequently shared) control of a family trust with enduring assets becomes an important estate planning issue for the people currently controlling their family trusts. Strategies such as assigning control to just one beneficiary (with other beneficiaries often being compensated with other assets) are often put in place.
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