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Flexibility of Distributing Income in a Testamentary Trust
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- Income or capital of the trust may be distributed between the beneficiaries in the most tax effective manner. The trustee is required to distribute the income in each year between the beneficiaries or to accumulate it (although accumulation may result in more tax being paid on that income). The trustee can elect to distribute that income to any one of the primary or general beneficiaries, none of whom have any enforceable interest to require that a percentage of the income or any fixed sum be paid to them in any year. The trustee has a similar power to distribute capital during the life of the trust.
- Also good estate planning often dictates that a spouse enjoys the income from the estate during his/her lifetime and on the death of the spouse the capital goes to the children. The advantage is that there is no capital gains tax event and the children receive the balance of income and all capital tax free whilst the surviving spouse continues to enjoy the fruits of the estate until his or her death.
Control as to When Trust Comes to an End.
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One can introduce trigger events that are not based only on death for example "when Joe turns 25"; or "when my wife remarries"; or "when the youngest of my children turn 25" etc.
- In addition, not all of the income and not all of the capital needs to be preserved. For example 20% of capital can be left immediately on death to beneficiaries and the balance can be held in a Testamentary Trust . The same applies to income. There are no hard and fast rules and any allocation/division of income and capital is permissible.
Growth of Deceased Estate After Death
The assets of a testamentary trust are not limited to the assets of the estate of the Willmaker. After the Willmaker's death, the testamentary trust can acquire other assets that create income streams to the testamentary trust. This income may also be excepted trust income and be subject to the same favourable taxation treatment when distributed to minor beneficiaries.
Providing for Both the Willmaker's Spouse and Children
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A testamentary trust satisfies the Willmaker's concern that the surviving spouse may make a new will at some future time, possibly reflecting a new relationship that excludes the existing children from the benefit of the assets accumulated by the Willmaker and the surviving spouse during their joint lifetimes.
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A testamentary trust can give the surviving spouse (or any person) a life interest in the estate or a life interest in just the income or just the capital or both. Thereafter the balance of income/capital or both will pass on to the children
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