Family Trusts v Testamentary Trusts

Using Trusts in Your Estate Plan

Estate Planning (EP) is a crucial step in ensuring that your assets are managed and distributed according to your wishes following your passing. There are a variety of tools that can assist in safeguarding your estate, including the use of trusts, which provide flexibility and effectiveness in achieving a range of EP goals. Trusts can provide both greater control and flexibility over the distribution of your estate, and potentially have additional tax benefits.

When contemplating EP, two common trust structures are Family Trusts and Testamentary Trusts, which serve similar purposes but differ vastly in their administration and composition. The main point of difference between Family Trusts and Testamentary Trusts are based upon their formation and when they come into effect. Family Trusts are also known as inter vivos trusts, and come into effect during the settlor's lifetime, upon execution of the Trust Deed. Contrastingly, a Testamentary Trust only comes into effect upon the death of the Willmaker.

Below is a comparison table setting out some of the key differences between Family Trusts and Testamentary Trusts:

Issue | Family Trust | Testamentary Trust

Establishing Document | Trust Deed | Will of Testator

Commencement Date | Starts from Date of Establishment | Starts from date of Testator's death

Income tax treatment for minors | Minors are taxed at penalty rates on income in excess of $417 | Excepted trust income treatment for minors under section 102AG(2)(a) ITAA 1936

Accumulating income | Taxed at highest marginal rate under section 99A ITAA 1936 | Taxed at highest marginal rate under section 99A(2) and 99 ITAA 1936

Required to make a Family Trust Election | Yes | Yes

Streaming capital gains and dividends | Trust deed must contain an express power | Trust deed must contain an express power

Capital Gains Tax (CGT) and stamp duty on transfer of assets into the trust | Normal rules apply | Exempt if the transfer is directed by the Will

CGT on capital distribution to beneficiary | CGT event E5 or E7 applies | Exempt under section 128-15 ITAA 1997 and PSLA 2003/12

CGT on vesting date passing | No CGT per TR 2018/6 | No CGT per TR 2018/6

CGT exemption on disposal of principal place of residence | Not available | Yes, if requirements in section 118-195 ITAA 1997 are satisfied

Requires TFN | Yes | Yes

If you have any questions in relation to Family or Testamentary Trusts, or would like more information regarding Estate Planning, please contact our highly experienced team at office@jenkinslegal.com.au or 02 4929 2000.

This article is not legal advice, and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.