Should you have a testamentary trust in your will?

Should you have a testamentary trust in your will?

Should you have a testamentary trust in your will?

If you are preparing a will, you may be thinking about the inclusion of a testamentary trust. These can be beneficial for a number of reasons, providing many advantages to your beneficiaries and even protecting your assets in certain circumstances.

What is a testamentary trust?

A testamentary trust is simply a trust that is set up in a will. This is different from a normal trust in that it only comes into effect once the will maker passes away. Otherwise, a testamentary trust is very similar to a family trust (a trust set up outside of a will for the benefit of family members).

In a testamentary trust, one person (the trustee) holds the legal title of an asset for the benefit of another person (the beneficiary), resulting in the assets held under the trust not forming part of the beneficiary’s estate.

The trustee can be any person of the will maker’s choosing, or can be a private trustee company. Ideally the trustee should have some financial management skills and should preferably not have a conflict of interest with the beneficiaries.

The beneficiaries of the trust can be named individually, or can be a class of people (for example “grandchildren”) to cover all existing and future people within that class.

Fixed or discretionary trust?

A testamentary trust could be a fixed trust, meaning each beneficiary has a fixed entitlement to either income or capital, or a combination of both. The trustee does not have discretion to vary the distributions.

Alternatively, a testamentary trust can be created in the form of a discretionary trust (known as a testamentary discretionary trust). This is a popular option which allows the trustee to have discretion over how the income and assets should be distributed to the beneficiaries. It provides greater flexibility to allow for the actual future needs of the beneficiaries, and can have significant tax advantages.

Benefits of a testamentary discretionary trust

  • It can be a particularly effective way of distributing income and capital gains in a way that takes advantage of the different tax rates that apply to various beneficiaries. For example, more income can be distributed to a beneficiary that sits in a lower tax bracket.
  • It can provide protection of assets for beneficiaries who may be vulnerable through disability or mental illness, or may be bankrupt or financially at risk.
  • It can be structured so that the assets stay within the family or direct descendants, For example, if an adult child passes away the assets in their trust can pass directly to their children rather than going to the child’s spouse through their will.
  • Children under the age of 18 can avoid penalty rates that they would otherwise receive on unearned income given to them through other means.
  • The assets in the trust can be protected from the beneficiary’s personal and business creditors, and may also be protected from the beneficiary’s spouse in the event of divorce or separation.

It should be noted that while testamentary trusts can provide an added level of protection and flexibility, they may be challenged both by beneficiaries and by eligible third parties. They can also be expensive legal structures to put in place, and the costs of operation and administration may be higher than those of a standard will.

As with all areas of estate planning and will drafting, matters can become complex very quickly and seemingly minor oversights can have very large unintended consequences down the track. To get advice from expert estate planning lawyers, please call Certus Legal Group on 07 3106 3016 or contact us using the form on this page.

This article does not give legal advice and should not be relied upon as such. It is intended to provide general and summary information on legal topics, current at the time of first publication. You should seek professional legal advice before acting or relying on any of the content contained herein.