Succession Planning
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Succession Planning

Succession planning refers to the transfer or redistribution of a deceased person’s estate, which is achieved either through a Will or in accordance with the law.

Effective succession planning can mean protection of assets against excessive taxes, creditors, claimants, divorcing spouses and estranged family members. Therefore, having a well prepared Will can have a positive impact on the value of your estate.

Testamentary trusts

Those who receive distribution from the estate under a Will are known as beneficiaries. One mechanism for protecting the interests of beneficiaries is through the use of testamentary trusts.

Trusts are created when someone transfers an asset to someone else (the trustee) to hold for the benefit of another (the beneficiary). The trustee takes no benefit from the asset for themselves.

The advantage of using a trust is that the person’s assets are preserved and protected, away from the clutches of those outside the pool of beneficiaries. The same protection would not be available if those assets were simply distributed as gifts under the Will.

Trusts can be created during the person’s lifetime. Such trusts are known as inter vivos trusts.

Testamentary trusts are trusts established in a Will by the willmaker or testator. Such trusts come into effect as part of the Will when the testator dies.

Most commonly, testamentary trusts are discretionary, which means that exactly how the income or capital of the trust is distributed is up to the trustee. Therefore, the beneficiary has no right to claim any specific benefits in the trust. The only right a beneficiary has is to the due administration of the trust by the trustee.

Discretionary testamentary trusts are generally the preferable form of trust because they allow for greater flexibility, and may allow for the trust to be distributed in accordance with the best interests of the beneficiaries.

Under most trusts, there is an appointor, who has the ability to remove and appoint trustees.

Advantages of testamentary trusts

In circumstances where the value in an estate is significant, a well-executed testamentary trust can lead to taxation advantages.

A second advantage is the protection of assets against the claims of third parties.

Thirdly, by placing the assets in a trust, the assets will be protected from any financial issues or other complications faced by the beneficiaries.

The trust can be in place for many decades after the death of the testator, ensuring that the estate can continue to look after the beneficiaries well into the future.

Tax advantages

One of the major tax advantages under a testamentary trust is that which is enjoyed by infant beneficiaries. The income received by infant beneficiaries under a testamentary trust enjoys the full tax free threshold of $6,000.00.

A testamentary trust has an advantage over inter vivos trusts because it is established under a Will, and according to taxation laws, income that results from a Will is eligible for taxation exemptions.

There is also the taxation benefit of income splitting which means that the income from an asset can be distributed to those beneficiaries that pay the lowest rate of tax.

Protection from third parties

Under a trust, an asset is held by the trustee and therefore separated and protected from any action against the testator’s estate.

If an asset is not protected under a trust, any of the following may happen:

• A creditor seeks to liquidate the asset to satisfy debts owned by the testator.
• A litigant wins damages against the testator and has a claim against the bequeathed asset.
• A disgruntled family member disputes the distribution of the asset under the Will.

Transferring control of an asset to a trustee removes any right of claim by third parties to the asset and thus avoids any of the above situations.

Protection against difficulties suffered by beneficiary

If unprotected, claims from third parties are not the only threats to the asset. The beneficiary themselves may be the root of the problem. Consider the following situations:

• The beneficiary goes bankrupt and loses their interest in the bequeathed asset to creditors.
• The beneficary is irresponsible with finances, such as through excessive gambling, and squanders the bequeathed asset against the wishes of the testator.
• The beneficiary otherwise deals with the asset against the wishes of the testator, such as by passing the asset on to someone outside the family.
• The beneficiary divorces their spouse who then claims an interest in the asset.
• The beneficiary does not have full mental or physical capacity to enable them to deal with the property themselves.

All these situations would be avoided if the asset was held in a trust. Having a trust in place as part of the Will gives peace of mind to the testator as to how their assets under the trust will be dealt with and disposed of after their death.

For example, if the only child of the testator was prone to obsessive gambling and was likely to use any benefit under the Will to feed his gambling addiction, the testator may choose to set up a trust in the Will in such a way that the son would continue to be looked after once the testator has passed away.

In another example, having a testamentary trust in place could avoid a situation where a beneficiary with an intellectual impairment is taken advantage of by someone. By taking away the beneficiary’s access to the asset and giving control to a trustee, the beneficiary is no longer exposed to exploitation.

Therefore, the beneficiary is restricted from unauthorised access to the asset, and all control is passed over to the trustee. A beneficiary can still dispute the actions of a trustee but such action would involve a costly process and require the assistance of a lawyer.

The other advantage would be that under a trust the testator could arrange that any benefit going to the beneficiaries could be delayed. Perhaps the testator wants the beneficiary to be of a certain age, or in a certain life situation, before receiving any benefit under trust.

Structure of the trust

Ultimately, how well the assets are protected in the trust depend upon the structure of the trust. Before establishing a trust, serious thought should be given to exactly what assets need to be protected, who should be a beneficiary, who will act as trustee, and how the trust should be constructed.

As mentioned previously, discretionary trusts are the most common form of testamentary trusts because they offer perhaps the most flexibility. However, you may consider that the trustee should receive more direction in the distribution and wish to include instructions on how and when the beneficiaries should benefit from the trust.

There is no restriction as to how many testamentary trusts can be established under any given Will. Further, it is possible to have a different trustee for each trust.

When there is more than one beneficiary, it may be preferable to set up a testamentary trust for each beneficiary. That way, each trustee can concentrate on the best interests of their respective beneficiaries.

Who should act as trustee?

A trustee can be an individual or a private trustee company. There can be more than one trustee per trust.

The choice of who you want to be trustee is entirely up to you. It could be someone in the family, a close friend, the executor of your Will, or a completely unrelated private company. However, it is important to keep in mind that the choice of trustee is crucial to ensuring that the trust is distributed effectively and in accordance with the wishes of the testator.

A trustee should: 

• be responsible;
• be trustworthy;
• have or has access to financial management skills;
• have an understanding of the testator's intentions for the trust.

The advantage of using a trustee company is that they are strictly regulated by the law, which ensures their professionalism and independence. However, there is a cost involved in using trustee companies.

Using an individual on the other hand means that there may be no cost and the trustee may have a personal relationship with the beneficiary. The flipside of that, of course, is the risk of a conflict of interest for the trustee.

It is possible to appoint the beneficiary as trustee, but of course making a sole beneficiary the sole trustee would not be wise in the situation where the assets have been placed in the trust to be protected from the beneficiary themselves. In such a situation, it may be wise to appoint an unrelated trustee company as co-trustee with the beneficiary, or instead of the beneficiary.

Other factors to take into account

If you are considering establishing a testamentary trust, you should be aware that there will be various costs involved. Legal advice and financial advice will almost certainly be essential in establishing a testamentary trust. You should also give thought to the administration costs involved in maintaining the trust, such as fees for preparing taxation returns.

It is also worth considering including a testamentary trust as an option in the Will, to guard against situations where the circumstances of the beneficiaries change unexpectedly.

Conclusion

Testamentary trusts are an effective way of securing your family’s future. When preparing your Will, give serious consideration to the inclusion of testamentary trusts for those of your assets which you wish to protect. You may also wish to seek financial and legal advice as to the specific taxation advantages which may be available in your specific situation.

For further information, contact Charles Slidders of Slidders Lawyers on (03) 9640 0002 or email: charles@slidders.com.au

DISCLAIMER: This information is of a general nature only and is not intended to be a substitute
for legal advice. It is recommended that these matters be discussed with a Lawyer.

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