What is a testamentary trust?

Testamentary trusts are created by Will and only come into effect after the death of the testator. Testamentary trusts are very useful estate planning tool and can provide greater asset protection and taxation advantages to beneficiaries.

The terms of the trust are set by the testator, which gives the testator a greater flexibility in determining the level of control that beneficiaries of the trust may have over the trust assets. Funds used in a testamentary trust can be all or part of the estate assets under the Will.

Various testamentary trusts can be established in a Will with the purpose of protecting different interests of different beneficiaries.

Types of testamentary trusts

There are two major types of testamentary trusts:

• discretionary testamentary trust; and
• protective testamentary trust.

When are testamentary trusts used?

Discretionary testamentary trusts are usually used with asset protection in mind. The trustee has a discretion of distributing capital or income between beneficiaries named in the Will.

Protective testamentary trusts are usually used to protect vulnerable beneficiaries, for example persons who are unable to manage their own affairs.

Who can be a trustee of a testamentary trust?

Any person (not bankrupt), can be a trustee, ie the executors or beneficiaries of the Will, or some other person, ie the testator’s children, surviving partner. For this reason, when choosing a trustee, the testator should choose a person that the testator trusts.

Different trustees could be appointed for different testamentary trusts created by the same Will.

In most states and territories in Australia, the life of a testamentary trust is usually 80 years. However, at the discretion of the trustee, the trust can vest (end) earlier than that.

What protection may a testamentary trust offer?

Testamentary trusts are usually used to protect inheritances for vulnerable beneficiaries or enhance the tax advantages for beneficiaries deriving an income from the trust.  The trust is only required to pay an income tax on the undistributed income of the trust and not on the income of the trust distributed amongst beneficiaries.

Testamentary trusts may offer protection to beneficiaries:

• from creditors;
• in the event of a remarriage from claims brought by future spouses;
• Family court proceedings;
• spend drift children, or children with addiction or gambling habits;
• against family provision claims against the estate;

Advantages

The assets of the trust are owned by the trustee for the benefit of income and capital of the trust to the beneficiaries. Some of the advantages of a testamentary trust are:

• protection of vulnerable beneficiaries, ie disabled children;
• tax benefits;
• securing funds for future educational needs of a beneficiary, ie grandparents leaving inheritance to grandchildren for their education.

Disadvantages

• Assets in the testamentary trust would only be protected from creditors when the trust is not controlled by the potentially affected beneficiary.
• Expenses related to the ongoing management of the trust, ie accounting fees related to the preparation of trust taxation returns.
• If professional trustee appointed, payment of professional fees will be incurred.

Conclusion

When choosing a trustee, it is important for the testator to choose a person that the testator trusts.

Before creating a testamentary trust, it should be determined whether the benefits outweigh the costs of creating and administering the trust.

 

If you need any assistance contact one of our lawyers at info@legallysmart.com.au or call 02 8332 6126 for a no-obligation discussion and for a specific legal advice.

Disclaimer: This article is for information purposes only, and it is not intended to be a legal advice.