Hypotheticals by Manny Wood. Published in the Coffs Coast Advocate on 17 March 2018.
Michael is in his late 60s. He has a child, Peter, who is in his 30s. Peter is married with three children.
Michael consults his solicitor regarding his estate planning.
They discuss putting in place a discretionary testamentary trust.
Michael’s solicitor discusses the matter with Michael’s financial planner.
The financial planner is interested in a testamentary trust for tax management purposes.
This means that Peter’s inheritance can be held in trust and the income received from the investment can be split between himself, his spouse and their children.
Under a testamentary trust, Peter’s children receive no tax penalties and are taxed as adults, meaning the normal tax thresholds apply. For example, if Peter’s inheritance generated an income of $40,000 per year, it can be shared amongst his family and not subject to tax at Peter’s marginal rate.
The financial planner advises Michael that although the cost of establishing a testamentary trust is more expensive than a simple will, the long-term benefits are well worthwhile.
Michael’s solicitor also advises him that testamentary trusts may be useful in terms of asset protection. This means that if Peter is declared bankrupt or his marriage breaks-down, his inheritance may be protected.
The trust structure would include a mechanism whereby an independent trustee is appointed if these issues arose. The trustee would have the discretion to make distributions from Peter’s inheritance in favour of Peter or his three children.
Peter could then argue, in the event of bankruptcy, that he has no direct entitlement to receive anything from the testamentary trust and therefore cannot be claimed.
Similarly, although the trust may be considered to be a “financial resource” in Family Law proceedings, Peter’s share cannot be specifically identified.
If you would like Manny to address a particular legal issue, send your request to manny.wood@ticliblaxland.com.au or call him on (02) 6648 7487.
