Asset protection strategies
Challenges that are out of your control can arise when you pass on an inheritance. These may include having a beneficiary who is a minor, a spendthrift or who is otherwise incapacitated. Your beneficiary may also have a former spouse who seeks to make a claim on their inheritance. Fortunately, there are structures that can be used to protect and preserve your beneficiary’s inheritance, whatever the issue.
Using testamentary trusts
The main structure used to protect and preserve your wealth when planning your estate is a ‘testamentary trust’. This is created by a will and can be effective in providing a greater level of control over the distribution of assets to beneficiaries in two key ways;
By protecting assets from waste and extravagance by beneficiaries.
By reducing tax paid by your beneficiaries from income earned from their inheritance.
How testamentary trusts work
Your beneficiary’s inheritance can be protected from excessive waste by giving the inheritance through a protective testamentary trust. This means the inheritance is totally controlled and managed by someone else – the trustee. This is a particularly popular structure for those with very young beneficiaries or beneficiaries who may not be deemed responsible enough to manage their own inheritance.
There are also steps you can take to help your beneficiaries protect their inheritance in the event of separation or divorce, including allowing them the option of accessing their inheritance via a testamentary trust. This way, any assets a beneficiary inherits are held in the name of the trust, meaning the assets are not subject to division between parties following a divorce or commercial breakdown.
Using testamentary trusts to minimise tax
Testamentary trusts are also used to minimise tax. For example, if a beneficiary takes their inheritance in their personal name, they will pay tax on the income generated from their inheritance at their personal marginal tax rate. However, there may be significant tax advantages in taking an inheritance through a testamentary trust, particularly where the beneficiary has:
- a high personal marginal tax rate
- a partner on a lower income
- children or grandchildren with no, or lower, taxable income.
To minimise the amount of tax paid, income generated from the inheritance can be split and streamed to beneficiaries of the trust who have a lower marginal tax rate.
Income distributed from a discretionary testamentary trust to any minor beneficiaries, such as children or grandchildren, has further potential for significant tax savings. This allows the beneficiary to distribute income more tax-effectively.
How Dixon Advisory can help
Our lawyers can assist in reducing tax liabilities for your beneficiaries and protecting your wealth with:
- advice on appropriate trust structures to best facilitate your goals
- assistance with setting up trust structures, including preparing deeds that reflect current trust law
- preparing ancillary documents that ensure your chosen investment structure is incorporated into your broader estate plan.