TAX TIP #13: TESTAMENTARY TRUSTS | ASSET PROTECTION

Facts

Mum and Dad pass away suddenly.

They have a Child (8 years old).

Their assets include the family home, investment property, cash in the bank and shares.

Question

Is gifting the assets to a Testamentary Trust, naming the Child as a beneficiary, better than gifting directly to the Child?

Answer

Yes.

However, it is not always beneficial to hold a family home in a trust. Please refer to Tax Tip #5 which discusses main residence trusts.

Tax Tip

1. There will be significant asset protection benefits if the assets were gifted to a Testamentary Trust.

2. Testamentary Trusts are an advantageous vehicle to be used in estate planning. They are commonly put in place to protect the inheritance of at-risk beneficiaries such as:

   1. minors;

   2. children of blended families;

   3. beneficiaries who are likely to mismanage an inheritance;

   4. beneficiaries who may be subject to Family Court proceedings;

   5. beneficiaries who are in high-risk professions and may be pursued by creditors.

3. Here, the Child is only 8 years old and will not be able to manage the assets and the income deriving from them. If the assets were gifted directly to the Child, the executor of the estate will hold the assets on trust and manage the assets until the Child turns 18, at which point the Child can call for the assets to be transferred directly to the Child. If instead the assets were gifted to a Testamentary Trust, Mum and Dad can decide at their discretion (via the Will) what age the Child can take control of the Testamentary Trust e.g. 25, 30 or 35 years old.

4. Let’s say the Child becomes a surgeon, earning $500,000 annual salary and is married to a pharmacist. The Child’s profession is considered high-risk, and thus any claim made against the Child means putting all of the Child's personal assets at risk. If the assets were gifted directly to the Child, the assets would be at risk via any claim made against the Child. If instead the assets were gifted to a Testamentary Trust, the Child will not personally own the assets, thus better asset protection.

5. If the assets were gifted directly to the Child, in the event the Child separates from their spouse, the assets will form part of the matrimonial property pool during a property settlement.

6. If instead the assets were gifted to a carefully constructed Testamentary Trust, it can provide better protection against the assets ending up in the hands of the spouse. Instead of being considered the Child's 'property', it potentially can be considered a 'financial resource'.
   

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