Your Will should be tailored to your personal circumstance. Before drafting your will, you need to consider the legality of conditions placed on gifts, tax and transfer duty implications and concessions and the impact of marriage and divorce.
There are different types of Wills.
Where you have limited assets, you are single, or in a first marriage or de facto relationship with children from that relationship only and you have a harmonious family you may have a simple will. A simple Will is not suitable if you have a blended family and/or you have a range of assets and/or family trusts.
Complex wills provide for a more sophisticated formula for distributing assets.
Complex wills can include the following provisions:
- The right of occupation for a beneficiary to occupy the deceased’s residence for his or her lifetime after which the property will be distributed to the will maker’s other beneficiaries.
- Provisions for children from previous relationship/s. If a will maker has children from a prior relationship or children from more than one relationship, special provisions may need to be included in the will to provide for each child.
As suggested by their name, these wills are complex and require careful drafting to cover a number of contingencies and to ensure that adverse or unintentional outcomes do not arise.
Mutual Will Agreement
A mutual will agreement is a legally binding contract entered into by you and your spouse. The purpose of a mutual will agreement is to ensure that when you die, your preferred beneficiaries are provided for in accordance with your wishes. Mutual will agreements generally prevent your spouse from changing certain provisions of their will.
Mutual will agreements can be advantageous in blended family situations; however, they also have disadvantages as they ‘lock’ your Wills and bind your spouse to an agreed distribution of your estate after your death unless otherwise agreed by the beneficiaries.
A trust describes an ownership structure where the assets of the trust are owned by one person or organisation (the trustee) but held for the benefit of other individuals or organisations (the beneficiaries).
A family trust is established by a family member during their lifetime for the benefit of members of the family group. The family trust can be the subject of a family trust election which provides it with certain tax advantages, provided that the trust passes the family control test and makes distributions of trust income only to beneficiaries of the trust who are within the family group. A family trust can assist in protecting the family group’s assets from the liabilities of one or more of the family members (for instance, in the event of a family member’s bankruptcy or insolvency). The family trust provides a mechanism to pass family assets to future generations subject to the rule against perpetuities and can provide a means of accessing favourable taxation treatment by ensuring all family members use their income tax “tax-free thresholds”.
A testamentary trust is a trust that is created within and by your Will but does not take effect until your death. It differs from a family trust (also known as an inter vivos trust) as a family trust is created by deed and commences during your lifetime.
A testamentary trust may be created using specified assets, a designated portion of your estate or the entire remaining balance of your estate. Multiple trusts may be created by the one Will and it’s possible to have trusts with different provisions which can be tailored to the needs of your beneficiaries. A testamentary trust has tax and asset protection benefits.
The primary beneficiary of the Trust can have the power to appoint the Trustee or the Will maker can nominate the Trustee.
Testamentary Discretionary Trust
In a testamentary discretionary trust (a more complex testamentary trust), the trustee has discretion to distribute assets between a group of beneficiaries nominated in your Will. The trustee may also have the ability to vest the trust at any time.
The advantages of testamentary discretionary trusts:
- Flexibility for your beneficiaries:
The trustee has the discretion to distribute capital and income to any nominated beneficiary at any time and in any proportion. The trust can be vested at any time or kept open for an extended period of time. This gives the beneficiaries flexibility and control over when and how they receive their inheritance.
- Tax Benefits and Flexibility:
A testamentary trust offers tax benefits because it allows the trustee to distribute the income of the trust to various individuals and their related entities in their discretion, allowing flexibility and taking advantage of beneficiaries differing tax rates (also known as income splitting and streaming).
The discretionary powers given to the trustee in the Will make the testamentary discretionary trust a flexible tax planning vehicle. Taxable income generated by the trust can be allocated to the beneficiaries of the trust in a tax-effective manner. The beneficiaries pay income tax on their share of income according to their marginal tax rates. Beneficiaries under 18 years of age are taxed at normal adult rates rather than at penalty tax rates. The potential for tax savings when trust income is allocated to children, therefore, may be substantial. A testamentary trust can be used to fund the education of minors and other costs of raising children quite tax effectively as they are treated as adult tax payers.
- Asset Protection:
A testamentary trust legally separates the inherited assets from the personal assets of the beneficiaries. Creditors of a beneficiary find it more difficult to claim against assets held in the testamentary trust. Where assets are inherited by beneficiaries under a standard will where they receive the assets personally, the creditors would be able to claim against those assets personally held by the beneficiary. The inherited assets are protected, in the case of a relationship breakdown of a beneficiary or bankruptcy.
Protective Trusts and Special Disability Trusts
These types of trusts are suitable when a person is vulnerable and it is not appropriate to allow that person control over their share of the estate. Beneficiaries who may be suitable for you to create these types of trusts for, include:
- A disabled beneficiary;
- A beneficiary who might be vulnerable to the negative influence of others; or
- A beneficiary who has problems with gambling or drug use.
These types of trusts in wills allow the will maker to appoint a trustee to manage the vulnerable beneficiary’s share of the estate. This means that the vulnerable beneficiary benefits from the estate but that their share of the estate is protected.
The primary objective of Special Disability Trusts was to make it easier for carers such as parents to ensure that children (including adult children) with a significant disability would be cared for when the parents were too old to provide the necessary care, and/or after the parents’ deaths. Also, they allow a substantial amount to be held for a disabled beneficiary without affecting their pension.
If you would like to speak about the best option for your Will or need your current Will updated, MP Commercial Lawyers would be happy to assist.