Is There any Advantage in Creating a Testamentary Trust?

Such a trust is created by a will. It takes effect when the trust creator (the settler) dies. Other trusts, such as discretionary or unit trusts, are created by a deed and come into effect as soon as the settler executes the deed and settles property upon the trust. In all cases the settler must appoint a trustee. In the case of a testamentary trust, the trustees may be the executors of the will, but need not be. The trustee may be one or more natural persons or a company.

With an ordinary trust, the settler or other parties must give assets to the trust. In the case of money, there is no problem, there is no tax or stamp duty on money. However, if property, shares, real estate, bonds or a business is being transferred, then tax and stamp duty issues arise. Such expenses as capital gains tax, stamp duty, income tax and others may be involved.

Additionally, income under an ordinary trust allocated to a person too young to control it is taxed at a special high rate. This penalty rate can be as high as 66% of the income. The test is not the legal capacity of the child, but whether or not the child can control its funds.

In the case of a testamentary trust, there is presently no tax on assets allocated to the trust by will and usually no stamp duty. In addition, income allocated to a child is taxed at the marginal tax rate applicable to the amount of the income.

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