TESTAMENTARY TRUSTS

TESTAMENTARY TRUSTS2019-02-11T09:13:05+00:00

Friedman Lurie Singh & D’Angelo specialises in advising on and preparing wills with testamentary trusts and other end-of-life documents.

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The Concept

A Testamentary Trust is a trust in a will which may provide significant asset protection with potential tax advantages for your beneficiaries. Such a trust governs the benefits of minor beneficiaries who have no legal capacity until they attain 18 years of age.

The concept arises from Section 102AG of the Income Tax Assessment Act 1936 (incorporated in the 1997 Act). This section removes the penalty rates of tax on unearned income (interest, investment dividends, etc) for children and allows ordinary tax rates to apply where the income is distributed from a trust estate created under a will; hence the name “Testamentary Trust”.

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The Problems

The tax problem: On a person’s death, the “usual” situation under a “simple” will is that:

  1. all assets are left to the surviving spouse and on the spouse’s death, to the children;
  2. the spouse’s tax free threshold is $18,200;
  3. in the simple will, children have no entitlement until the surviving spouse dies; and
  4. the spouse invests the assets and receives the investment income on which tax is calculated.

In effect, this means that in a “simple” will, a maximum of $18,200 income per annum can be earned tax free.

The “Simple Will”
Assets in Estate
Surviving Spouse – Sole Beneficiary
Income from Invested Estate Assets
Spouse $18,200

Tax Free Income: $18,200 p/annum

What Does This Mean?

Without proper planning, a family may be left with a tax-free threshold of only $18,200 and pay tax on the excess. This equates to only $350 tax-free per week for this family.

By not putting in place a Testamentary Trust, a major beneficiary of your estate may be the Australian Tax Office at the expense of your family.

One Solution – Testamentary Trust

A Testamentary Trust in your will may increase the family’s tax- free income (using tax-free threshold rates effective from 1 July 2018).

Assets in Estate
Testamentary Trust in Will
Income from Invested Estate Assets in Testamentary Trust
Spouse Child 1 Child 2 Child 3
$18,200
$18,200
$18,200
$18,200


Tax Free Income: $72,800 p/annum

In this example, the introduction of a Testamentary Trust provides the family with three times the tax- free income than in a “standard” will, (i.e., an additional $54,600 per annum tax-free or an extra $1,050 a week tax-free).

The asset protection problem

Under a “simple” will assets are often distributed to the deceased’s children who then own those assets. If a child is involved in a family law property dispute, that child’s assets are exposed to the claim. Creditors can also claim against your child’s assets (which include your former assets) – as to which see further Asset Protection.

Your children may also “blow” their inheritance for which you worked so hard. But if your estate is left in a Testamentary Trust, it will be protected and conserved.

So, if your assets are gifted to your children so that your children own them, third parties (creditors) may claim against those assets.
If, however, assets are gifted to a testamentary trust over which your spouse and/or your surviving children have control (not ownership), then because the trust and not the children own the assets, third parties may not be able to seize the assets.

In the will you may impose conditions on how and when the testamentary trust makes distributions to the trust beneficiaries (who may be your spouse and/or children) which your spouse and/or children themselves may control or you may appoint others to this position.

A standard will afford none of these protections. A will with a testamentary trust gives control of the assets in the trust to your appointed trustee (surviving spouse or surviving children) but does not gift assets to them so that these assets are protected from third party claims.

Tax Rates 2018-19

Taxable income Tax on this income
0 – $18,200 NIL
$18,201 – $37,000 19c for each $1 over $18,200
$37,001 – $80,000 $3,572 plus 32.5c for each $1 over $37,000
$80,001 – $180,000 $17,547 plus 37c for each $1 over $80,000
$180,001 and over $54,547 plus 45c for each $1 over $180,000

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Why you should Contact Us

We have 5 conveniently located offices in Perth, Jindalee, Joondalup, South Lake, and Rockingham to deal with your requirements. You do not need to come into town to see us! We are in your local area for your convenience!

We have a dedicated team of lawyers who love their involvement in law and enjoy providing high-quality legal services at a competitive price to members of the public of Western Australia, which we have been doing since 1989.

For all your wills and end-of-life enquiries, call us for a free no obligation telephone consult on 08-9254-0000 or submit an online enquiry using the form below.

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