TAX TIP #19: | TESTAMENTARY TRUSTS | LINEAL DESCENDANTS

Facts

Mum and Dad have a combined estate including their home, investment property and shares.

They have a daughter who is married with children, and a son who is currently engaged.

Mum is concerned that, in the event that she predeceases Dad, his future spouse and children will have the benefit of her share of the estate. She would also like to limit her children's spouses from benefiting from her estate, if possible.

Tax Tip

1. Mum can prepare a Will directing that her share of the estate will be held in a testamentary trust for the benefit of her lineal descendants only, which include children or remoter issue (grandchildren, great-grandchildren and so on).

2. Mum has two options:

   1. Option A: Protect the Capital Only

      1. the capital can only be distributed to a specific group of lineal family members. In this instance, the capital, being the home, investment property and shares will only be distributed to Mum's children and remoter issue;

      2. the income derived from the assets of the testamentary trust, however, can have a wider class of beneficiaries which allows greater flexibility in relation to distributing income. In this instance, the rental received from the investment property and the dividends received from the shares will have a wider class of beneficiaries which may include Dad, the children's spouse, aunts, uncles, nephews, nieces and so on.

   2. Option B: Protect both the Income and Capital Both income and capital are restricted to be distributed to the specific group of lineal family members only.

3. Dad will continue to own his assets and will have the benefit of those assets as he wishes.

4. The children's spouse will not have access to the capital assets of the testamentary trust as they will not fall under the lineal family member group. However, they may have access to income, depending on whether Mum directs the use of Option A or Option B.

The establishment of the trust will ensure that Mum's estate is quarantined for the benefit of her lineal descendants only, and those who are outside of this group cannot benefit.

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