Protecting your family fortune from the son or daughter-in-law from hell August 3rd, 2022
Protecting a lifetime’s work can often become a source of much angst if it looks like your offspring might be in a position where they could lose the lot.
It might be a rocky relationship, a spend-thrift lifestyle or serious mental or other health issues, but the heart of the discussion is often about how to stop the family fortune disappearing into someone else’s pocket.
Working closely with the legal profession, the tools available to financial advisers are powerful and varied. Apart from protecting your estate, the spin off benefits could see your family fortune funding your great grand-daughter’s education at St Hilda’s, with some of it tax free.
At the heart of the arrangement is a special vehicle known as a Testamentary Trust.
It’s a trust that only comes into being when you die and like a phoenix that springs from the ashes (perhaps an unfortunate analogy), the trust is activated when probate is granted.
Your will would now leave your estate to the Testamentary Trust, rather than directly to the individuals.
A normal 4 or 5 page Will is beefed up with a trust deed which is a set of written rules explaining how the trust will operate.
This is often a will that’s measured in thickness, rather than pages.
The deed sets out what things the trust can do, the forms of investment it can make and importantly, who the players are. These will invariably include the beneficiaries of your estate and the list of beneficiaries can be as broad or as narrow as you want it to be.
It could for example, simply name “all of my grandchildren and their descendents”, bypassing your children and their spouses.
The deed will also need to set out who the boss or trustee of the trust is and again, this might be your child, a sibling or others. Importantly, the trustee’s legal duty it to act for the listed beneficiaries - and no one else.
The trustee might also be given discretionary powers to distribute to the beneficiaries as they see fit. That discretionary power means they can make distributions of income or capital from the trust as required.
The last significant benefit of a testamentary concerns taxation. And while some use Self Managed Super funds a type of estate planning tax tool by including the kids as members, the humble Testamentary Trust shouldn’t be ignored.
Minors (or kids under 18) who receive distributions from these trusts are taxed at the same rate as adults. They could receive $18,200 tax free from the estate per annum.
That figure is much higher than the $416 per annum they are normally permitted to earn before paying income tax.
$18,200 might go some way to paying for the school fees or at the very least, those riding lessons.
The costs of a Will incorporating a testamentary trust aren’t insignificant and they won’t be part of the free Will kit that turned up with your funeral insurance policy.
Essentially, they are a trust deed and a Will combined in the one document. Costs will vary but typically, they sit around the $2,500 mark. It’s a big outlay for a Will but consider it an insurance policy to ensure your family fortune doesn’t end up with the in-laws or in the pockets of a spendthrift child.