Well this blog is not about Self Managed Super Funds but is about a matter close to the hearts of many of my clients. As a parent or grandparent, ensuring that children receive a good education is one of the most common concerns raised with us at Verante. Many people want to leave provision in their wills for such costs so here is one of our preferred strategies.

You can establish a dedicated education fund through a testamentary trust in your Will. This is a tax-effective and flexible way to provide for the education of your children or grandchildren. It can also help to ensure that the funds you want to be applied for their education are preserved and not misused by young beneficiaries or caught up in the complications caused by the rise of complicated blended families (his, hers and ours issues).

If you are a grandparent, leaving bequests via a testamentary trust for payment of education fees and related costs for your grandchildren is a more tax effective method of providing for their education rather than leaving additional bequests to their parents that may be caught up in marriage breakdowns, business bankruptcy or litigation.

What is a testamentary trust?

In general, a trust describes an ownership structure where the assets of the trust are held by a person or organisation (the trustee) for the benefit of other individuals or organisations (the beneficiaries).

A testamentary trust is a trust that is created within and by your Will. You need to arrange it as part of your Will making but it only comes in to effect on your death.

A testamentary trust may be created using specified assets, a designated portion of your estate or the entire remaining balance of your estate. Multiple trusts may be created by the one Will.

Normally the Trustee of this trust will be the executor of your estate, a surviving spouse or sibling of the deceased. You also have the option of appointing an Independent trustee company. Often this trustee will step down when the beneficiary reaches a target age or completes their education.

What is an education fund?

Assets inherited directly by your beneficiaries become part of their personal assets and are under their control. The future of these assets depends on the beneficiary’s ability to manage their own financial affairs, with no guarantee that the assets will be applied for any particular purpose, such as their education.

An education fund is a trust which focuses on funding the education of a particular beneficiary (the ‘primary beneficiary’). It gives you assurance that the income of the trust will be directed to the educational and other purposes you have specified in your Will.

You set the terms of the testamentary trust in your will. These terms can restrict the ability of any of the beneficiaries to control the activities and investments of the trust or give them complete control. You are in effect choosing to ‘rule from the grave’ to ensure that the inherited assets are protected and used sensibly for the benefit of the primary beneficiary

How does an education fund operate?

The typical features included in an education fund are:

• The trust can be funded by your some or all of your assets and by payments in consequence of your death such as superannuation death benefits or insurance proceeds paid to your estate.
• A proportion of your estate is held on trust until the primary beneficiary (child/children) achieves a particular level of education or satisfies other conditions established in your Will. Many of our clients choose age 25.
• The trustee has the power to apply the income and capital of the trust for a variety of purposes specified in your Will for the benefit of the primary beneficiary, with the emphasis being on the educational needs of the primary beneficiary.
• During the financial year, income and capital are distributed to the primary beneficiary to the extent required for the approved purposes. Any remaining income is either accumulated within the trust or distributed to other beneficiaries, as directed by the Will.
• When the primary beneficiary has satisfied the conditions specified in the Will (such as attaining a particular level of education or age), they gain control of the remaining balance in the education fund and may either continue the trust or vest it (end it) at any time.
• If the primary beneficiary fails to satisfy the conditions within a specified period, the trustee may determine that the remaining balance in the education fund be distributed to other beneficiaries named in the Will or held on trust for the education of those beneficiaries (or their descendants).

An education fund will normally be a mandatory trust imposed upon the beneficiary due to your desire that they continue their education to a specified level. The beneficiary will not normally be given the option of terminating the trust or eventually inheriting the trust without satisfying specified conditions.

Example

George and Helen have a combined estate worth $1,500,000. They have three young grandchildren whom they wish to make their beneficiaries as they had already helped their children to set themselves up as financially secure.

George and Helen are concerned that, in the event of their deaths, their grandchildren will not be sufficiently mature to use their inheritance responsibly. They wish to establish an education fund to ensure that the grandchildren are encouraged to further their education, but are also adequately provided for during their developing years.

As a result, George and Helen’s Wills provide that 50 per cent of the inheritance received by a child ($250,000 each) will be held in testamentary trust funds on the following terms:

• Until the beneficiary turns 25, their access to the income and capital of the trust is limited to specified purposes, such as:
  • education expenses, including HECS liabilities
  • hospital and medical expenses
  • rent or accommodation charges
  • electricity, gas and other utility payments
  • maintenance and income support at the discretion of the trustee.

• If a specified level of tertiary education has been completed by the age of 25, the beneficiary will be given full control of the trust at the time of attaining that educational level, with the ability to either continue the trust for tax planning purposes (as a tax-effective vehicle for supporting the education of their own children) or terminate it.
• If the beneficiary does not attain the required level of education by the age of 25, the remaining balance of the education fund will be distributed amongst charities specified in the Wills.

The education funds will ensure that each child is adequately supported, but also given an incentive to further their education. If all children were from the one family you could use just one Trust.

Additional issues to discuss with your legal expert

Common areas which require further thought are:-

• Whether to have one or several Trusts established under the Will
• The selection of the appropriate trustee or trustees
• The method of appointing replacement trustees
• Whether some classes of beneficiaries are restricted to income and some to capital

Back-up Strategy

There is a second chance for your family to establish a testamentary trust after you die but this second chance must be taken advantage of within three years of your death. This enables a trust to be established from your assets and for the income to enjoy the same tax advantages as income derived through a testamentary trust. However, the assets used to establish the trust cannot exceed the amount which the beneficiary would have received under the law, if you died without a Will.

I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options or get a referral do a recommended Estate Planning solicitor. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

Tel: 02　98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

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