But I made a will!
Most people would be horrified to think that their estate might not end up in the right hands when they die – particularly when they have gone to the trouble of writing a will.
Unfortunately it can happen, resulting in bitter family disputes about who got what and why.
In a typical “mutual will”, spouses leave their estates to one other, and subsequently when the surviving spouse dies, equal amounts to the kids. But this may not offer enough protection for people who have quite substantial assets. The government, or an unexpected raider, could end up getting a seemingly unfair cut.
There might be an unexpected tax bill. An ex-spouse of one of your children may claim they are entitled to some of the estate. Creditors may demand that one of your kids’ business debts be paid from their inheritance money.
These are but a few examples of possible risks to family wealth.
Enter the testamentary trust, a form of “super will”. For people with valuable estates, a testamentary trust can help minimise these kinds of losses.
It can protect you by distributing assets to family members in a way that minimises tax. For example, with a testamentary trust, income distributed to your children is taxed at normal marginal rates, rather than the higher penalty rates that otherwise apply to their unearned income.
A trust can offer safeguards, so that “spendthrift” beneficiaries are protected from themselves. (In other words, so they’re not able to blow the lot.)
It may be set up to provide care for children when they are young, or for beneficiaries with a disability. And a trust can prevent creditors from getting their hands on inheritance money if a beneficiary owes a debt.
It can also help to keep an inheritance out of the reach of a former spouse of your child, such as when a beneficiary is involved in a property dispute following a relationship breakdown.
It may even help a beneficiary keep their pension or other government benefit, which might otherwise be lost when they receive a large inheritance.
Beneficiaries in financially high-risk occupations, like professionals and business owners, may prefer not to risk receiving inherited assets in their own name. Again, that is achievable with a testamentary trust.
And the beauty is that separate testamentary trusts can be created within a will for each person inheriting, so that protection is tailored to their specific needs.
When you make your will, you get to decide how much decision-making power the trustee (who controls the trust’s assets) has over who receives capital and income, and when.
So if you have substantial assets, you should consider looking beyond a basic will. A testamentary trust could better protect your hard earned estate for your loved ones.
For more information please see Testamentary trust or discretionary trust – which is best for you?