Succession Planning

The term ‘testamentary trust’ generally means that one or more discretionary trusts are established by the Will which will hold and invest estate assets that remain after making specific gifts.

There are a range of testamentary trusts that can be used in a will, including a trust for a specific purpose or one that is similar to a typical family discretionary trust (‘FDT’).  Alternatively, the trust could include a range of beneficiaries and be designed on a similar basis to a FDT, with family members, relatives, associated companies and trusts, and approved charities as beneficiaries.  This type of testamentary trust normally has a maximum life of 80 years from the date of the deceased’s death unless the trustee terminates or vests the assets earlier.

Benefits of a Testamentary Trust

One of the most compelling reasons for a person to establish a testamentary trust in their will is to restrict access to the assets and income of the estate by the beneficiaries if beneficiaries are young children or are unable to manage their own financial affairs.

The discretionary beneficiaries do not have a legal interest in the income or capital of a testamentary trust rather, they have a mere expectancy.  This is very important in the event that any of the beneficiaries become involved in a sizeable legal action, bankruptcy or divorce/separation proceedings.

From a tax viewpoint, the potential benefits of a testamentary trust are:

• The ability to split income between family members including children, grandchildren, companies and trusts.
• Greater flexibility when providing income to minors at normal marginal tax rates (eg, by allowing income to be applied such as applying income towards their education, maintenance or advancement).
• Providing an effective means of making discretionary distributions of income to charities. 

A power of attorney is relevant if a person is unable (eg, due to incapacity or being overseas) to make their own decisions relating to their legal, financial, medical and lifestyle affairs. Each Australian State and Territory’s legislation therefore allows a person to appoint another person(s) (known as an ‘attorney(s)’ to make these decisions when they are unable to do so.

In Victoria, a person (generally known as the ‘donor’) can make the following Powers of Attorney:

Enduring Power of Attorney (Financial)

This document empowers the attorney(s) to act on the donor’s behalf in relation to all their financial and legal affairs.

Enduring Power of Attorney (Medical Treatment)

This document empowers the agent to make medical decisions on their behalf and only takes effect when the donor is unable, by reason of incapacity (eg, due to unconsciousness), to make their own decisions in this regard. The agent can make decisions regarding consenting to an operation, the administration of a drug or any other medical procedure.

Enduring Power of Guardianship

This document empowers the guardian to make decisions on behalf of the donor on all health care and lifestyle matters in the event that the donor suffers a disability. This is very important when a person loses mental capacity or becomes old and frail and may be vulnerable to pressure from others, including family members.