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 under a will but it does not come into effect until after the death of the person making the will.
A Trust describes a structure whereby assets are managed by one person (or persons) i.e. a Trustee, for the benefit of others (the beneficiary or beneficiaries).
Under a Testamentary Trust the Trustee has the discretion to distribute capital and income between a group of beneficiaries nominated in your will. We try to include a wide number of potential beneficiaries to give greater flexibility to the Trustee in distributing the capital and income between such beneficiaries.
There is no standard format for a Testamentary Trust and they are adapted to suit the needs of a particular person/family.
What are the benefits of a Testamentary Trust?
There are many benefits as follows:
1. Flexibility for your beneficiaries
The Trustee may distribute capital and income to any nominated beneficiary at any time and in any proportion. A Testamentary Trust gives the beneficiaries both flexibility and control over when and how they take their inheritance.
2. Protection of Assets
The assets form part of a Trust and therefore they cannot be taken out of the Trust without the Trustee agreeing to distribute them to the beneficiaries. None of the assets are legally owned by the beneficiaries which may protect the assets of the Trust from some of the following circumstances:-
2.1 Divorce/breakdown in relationship of a beneficiary - if an intended beneficiary is in a "shaky" relationship (such that the marriage or de facto relationship will dissolve in time), then if the assets are held in a Testamentary Trust, they are not classed as assets of any individual and therefore the Family Court cannot make an order requiring the distribution of those funds. In other words the spouse or partner of an intended beneficiary will not reap the benefits of an inheritance.
2.2 Creditor protection - to protect the bequest from creditors of a beneficiary. If an intended beneficiary had a number of creditors and/or is likely to be at risk of being made bankrupt, the Will maker can protect the bequest of monies under a will to them so that the inheritance will not be at risk of being required to be given to the 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 his/her share of your estate is kept in tact.
(c) Remarriage of spouse - in this situation the Testamentary Trust is useful for families 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, uses 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 potential beneficiaries under the Trust. Therefore, 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 under the Trust). A child (minor under the age of 18 years) is currently entitled to receive a tax free annual income from a Testamentary Trust of $6000 (this is tax free only if the child has no other income).
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 has effective control of the Trust, so the Trustee should be a person or persons who the Will maker knows and whom the Will maker Trusts are acting in the best interests of those who will receive the main benefit of either the whole or part of the estate that the Will maker left subject to the testamentary Trust.
It is possible to establish a number of testamentary Trusts under a Will and name different Trustees for each of them.
What should I consider before establishing a Testamentary Trust under my Will?
There will be ongoing administrative costs involved in maintaining a Trust, such as accountancy fees for preparation of Trust taxation returns. Factors that 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 apply to one or more of your intended beneficiaries.