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The benefits of having a Testamentary Trust and using it to your benefit.

In Part 2 of our Part 5 series Wills & Estates Solicitor Richard Dawson takes us through the analogy of using the structure of a Testamentary Trust as a Bank Model.

Contact our Lawyers Gold Coast team for more information on Testamentary Trusts.

See Part 1
See Part 3
See Part 4


Today, we’re going to talk about part two of our five part series regarding testamentary trusts. Today’s topic will discuss the benefits of a testamentary trust and using it in a similar style as a bank.

For example, if I use the scenario where a testamentary trust has been set up in a will maker’s estate and a million dollars, for example, has been placed into that testamentary trust following the completion of an estate administration then the trustees of the testamentary trust in effect can act as a bank manager and they are able to loan the beneficiaries of the testamentary trust with money under certain circumstances.

For example, let’s say one of those beneficiaries wanted to purchase a principal place of residence but there was risks in that beneficiary’s marriage. For example, if it was a bit rocky, they may wish to put a loan agreement in place to ensure that if in the event of a divorce, that the trust’s capital loaned to purchase that principal place of residence could be repaid.

So, think of the trustees as a bank manager and the beneficiary as a customer. If that customer ever went to the bank manager and asked for a loan on terms to purchase a property, then the bank manager is going to ask for two things.

One, a formal written loan agreement with various terms such as interest repayments, interest rate and the term, and they also asked for a first registered mortgage to be placed over the property so that the bank’s interest, or in this case, the testamentary trust’s interest, is secured by the mortgage.

The advantages of having a loan agreement and a first registered mortgage on title is that the trust’s capital will always be protected. So, assume the beneficiary comes to the bank manager and says, I want to purchase a principal place of residence for $800,000, will you lend me the money? The trustees, who act as the bank manager, will then say, yes, we do, on these terms and conditions.

They will complete a loan agreement and a first registered mortgage, and the money will be lent to the beneficiary to buy the principal place of residence. The advantage of this is that the customer, namely the beneficiary, can, one, save on stamp duty because they will receive the primary place of residence exemption, which is a lower stamp duty rate than if purchasing in the name of the trust as an investment property.

Secondly, as it is a principal place of residence, there will be no ongoing land tax obligations, which could save thousands of dollars a year.

Thirdly and probably most importantly, when the property is ultimately sold, hopefully under good terms and conditions, not under a family court property settlement, but when the property is sold, if there has been any capital gain achieved during the course of ownership, then that capital gain is 100 % tax free because the person owns the property as their principal place of residence.

So, practically speaking, if they purchase a property for $800,000 and there is, say, for example, over 10 years, there might be $400,000 or $500,000 capital gain, the property is now worth $1.2 or $1.3 million. The loan has to be repaid.

So there’s $800,000 has to be repaid to the testamentary trust bank account, and at the discretion of the trustee, depending on the terms of the loan agreement, they may also wish for the compounding interest, which may or may not have been paid along the way, that can also be repaid back to the trust.

Therefore, there might be several hundreds of thousands of dollars in unpaid interest, which can be accumulated and paid back to the testamentary trust. So not only has the trust provided a principal place of residence for the beneficiary over many years, the beneficiary may not have had to pay interest or principal repayments depending on the loan agreement, and the trust’s investment in the principle property has been secured by way of a first registered mortgage.

So overall, there are some very good benefits with using the testamentary trust as a bank account and allowing the beneficiaries the use and enjoyment of their principal place of residence, knowing that their investment is secured. There are a number of other ways that we can use the trust as a bank, but if you need further information, please contact me at our office and I’ll be happy to discuss those benefits with you.

Essentially, that is the benefit of using a testamentary trust account as a bank. Next series, we’re going to talk about the roles of a testamentary trust in a person’s will, protecting the beneficiaries from a family court property settlement, and also protecting a beneficiaries from various creditors and predators.

I look forward to speaking with you then. Bye for now.

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