What is a Testamentary Trust and Should I Have One?
Incorporating a testamentary trust within your will can provide significant flexibility along with asset protection and tax minimisation for those who benefit from your estate.
What is a Testamentary Trust?
It is a trust established in a will but it does not come into effect until after the death of the person making the will.
A trust is a structure where assets are managed by a trustee or trustees for the benefit of others (beneficiaries).
Under a testamentary trust the trustee usually has discretion to distribute capital and income between a group of possible beneficiaries. Including a number of potential beneficiaries gives the trustee greater flexibility in distributing the capital and income.
There is no standard format for a testamentary trust and each one is adapted to suit the needs of the particular person or family.
What are the benefits of a Testamentary Trust?
1. Flexibility for your beneficiaries
A testamentary trust gives the beneficiaries both flexibility and control over when and how they take their inheritance because the trustee may distribute capital and income to any nominated beneficiary at any time and in any proportion.
2. Asset Protection
None of the assets are legally owned by the beneficiaries, while they are in the trust, which may protect the assets of the trust from some of the following circumstances –
2.1 Divorce/breakdown in relationship of a beneficiary
If the assets are held in a testamentary trust, they may not be classed as assets of any individual and therefore the Family Court may not make an order requiring the distribution or division of those assets. In other words the spouse or partner of an intended beneficiary may not reap the benefits of an inheritance.
2.2 Creditor protection
If the assets are held in a testamentary trust, they will not be at risk of being required to be given to a trustee in bankruptcy or creditors.
2.3 High Risk Beneficiaries
If an intended beneficiary is in a high risk profession or business where negligence claims are likely, a testamentary trust will protect the inheritance.
2.4 Will challenges
If an intended beneficiary receives monies in your estate via a trust then, as it is not in that beneficiaries estate, it cannot be subject to a will challenge when they die.
3. Protection of Beneficiaries
3.1 Vulnerable Beneficiaries
(a) Social Security Entitlements
If an intended beneficiary receives a social security entitlement such as a pension or disability support pension, they would be at risk of losing such entitlements if they were to receive a lump sum inheritance and therefore a testamentary trust enables them to have monies distributed to them or to others on their behalf to meet their needs from time to time with the effect that they are not at risk of losing their social security entitlements.
(b) Vulnerable beneficiaries
If one of the intended beneficiaries is either a spendthrift or has gambling/drug addictions, you can provide for such a beneficiary through a trust ensuring that their share of your estate is kept intact.
(c) Remarriage of spouse
In this situation the testamentary trust is useful for willmakers who wish to provide for their spouse but are concerned that the spouse may remarry and divert the family assets to the new family or, as sometimes happens, use the family assets in risky or unprofitable ventures at the suggestion of the new spouse.
3.2 Taxation Advantages
Taxable income generated by the trust can be allocated to the beneficiaries of the trust in a tax effective way. Under the trust, the trustee has the power to distribute the trust income to any of the persons nominated as a potential beneficiary of the trust. For example if the spouse, partner or dependant of an intended beneficiary is not working or receiving an income, the trust may allocate income to such a person (provided they are nominated as a potential beneficiary). A child (minor under the age of 18 years) is currently entitled to be taxed on income from a testamentary trust at normal adult tax rates (including the tax free threshold – currently $18,200.00)
Who can be a Trustee of a Testamentary Trust?
Anyone you wish, including the executors of your will, their spouse or partner or their children. The trustee should be a person or persons who the willmaker trusts to act in the best interests of those who will receive the main benefit of either the whole or part of the estate that the willmaker left subject to the testamentary trust. It is possible to establish a number of testamentary trusts in a will and name different trustees for each of them.
What should I consider before establishing a Testamentary Trust in my Will?
There will be ongoing administrative costs involved in maintaining a trust, such as accountancy fees for preparation of trust taxation returns. The things you should consider include whether the income generated by your estate will be sufficient to warrant a Testamentary Trust, whether you have sufficient assets in your estate and whether any of the above situations apply to one or more of your intended beneficiaries.
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This article is general in nature and does not constitute legal advice. If you require legal advice in relation to your personal circumstances, you must formally engage our firm, or another firm to provide legal advice in relation to your matter. Bradley & Bray lawyers takes no responsibility for any use of the information provided in this article.
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