Wills & Asset Protection Trusts: Why your beneficiary’s circumstances are as important as yours

An Asset Protection Trust (also known as a Testamentary Trust) is simply a Trust created by a valid Will and funded by Estate Assets.

What is an Asset Protection Trust? (also known as a Testamentary Trust)

An Asset Protection Trust is simply a Trust created by a valid Will and funded by Estate Assets. The Trust commences when the Executor finishes administering the Estate. There a many different types of Testamentary Trusts that can be established in a Will.

Most Asset Protection Trusts appoint the ultimate beneficiary as the Trustee of the Trust and grant them an absolute discretion in relation to the Trusts administration. Asset Protection Trusts may also be optional or mandatory. Generally Asset Protection Trusts are optional so that the Primary Beneficiary has the option of not using the Testamentary Trust in whole or in part as well as the ability to wind up the Asset Protection Trust at any time.

Why are Standard Wills inferior to Wills creating Asset Protection Trusts?

Standard Wills leave inheritances absolutely. There is, therefore, no protection of the inherited asset for Beneficiaries from creditors, former partners or persons who subsequently make a claim for provision from the Beneficiary’s Estate.

As a result of the lack of asset protection of inheritances via a Standard Will there is no real certainty that the inheritance will stay in the family in the long term.

All income generated from an inherited asset or the investment thereof is received by the Beneficiary personally. There is, therefore, no opportunities to minimise tax payable on income or capital gains in connection with an inheritance.

Beneficiaries’ real inheritance may differ due to taxes payable on different inherited assets resulting in inequality for Beneficiaries who might have been intended to receive equal shares. Standard Wills do not make any provision for dealing with such inequalities.

Standard Wills do not typically make any provision for the effective passing of control of Family Trusts, Family Companies, Self Managed Super Funds or other investment structures.

Beneficiaries have no flexibility on how best to receive and manage their inheritance having regard to their circumstances, and expected future circumstances, at the relevant time.

Benefits of Asset Protection Trusts

Asset Protection Trusts are one of the most effective vehicles for achieving asset protection for Beneficiaries and are particularly important as it is virtually impossible to know exactly what a Beneficiary’s circumstances will be at the date of death of a Willmaker or thereafter.

Discretionary Asset Protection Trusts also provide advantages for tax minimisation by allowing taxable capital gains and taxable income to be distributed to one (1) or more persons of class of persons who are beneficiaries of the Asset Protection Testamentary Trust.

Significantly, whilst penalty rates of tax would ordinarily apply to income of a Trust that is distributed to a child, special laws exist in relation to Asset Protection Trusts such that minor children who receive income from a Asset Protection Trusts are treated as adults for tax purposes. Substantial significant tax savings can, therefore, be achieved where income of the Trust can be distributed to minor children.

Talk to our experienced Estate Planning Lawyers about whether you should include a Asset Protection Trust in your Will, and if so, what type of Asset Protection Trust.

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The information in this article is not legal advice and is intended to provide commentary and general information only. It should not be relied upon or used as a definitive or complete statement of the relevant law. You should obtain formal legal advice specific to your particular circumstance. Liability limited by a scheme approved under Professional Standards Legislation.

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