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Testamentary Trusts
A Traditional Will allows you to:
- Appoint an executor; someone who carries out the provisions of your will,
- Appoint a guardian to care for any young children,
- Make specific gifts to individuals or charities,
- Distribute the rest of your estate; and
- Name alternative beneficiaries in a situation where your first preference beneficiary dies before you.
The Problem With Traditional Wills
The beneficiaries of a Traditional Will have no choice other than to take their gift in their own name or refuse it altogether. This lack of choice may cause tax and other problems.
The Solution - A Testamentary Trust
A testamentary trust is simply a trust established in a will and does not come into existence until the Will maker dies. Until then your Will has no effect and you can change it at any time.
The Testamentary Trust Will creates simple optional testamentary trusts for each beneficiary.
The Testamentary Trust Will
The Testamentary Trust Will does everything a Traditional Will does, plus it gives your beneficiaries the flexibility and choice they need to protect and make the most of their gift from you.
The use of a Testamentary trust gives the beneficiary the potential to:
- Reduce tax by:
- allowing the beneficiary to distribute the income and realised capital gains to a range of people to gain the best tax outcome
- having the income received by young children taxed at normal marginal rates instead of top marginal rates. This can result in a saving of up to $20,542.00 per child per year.
- Clearly identify an inheritance to keep your gifts to beneficiaries separate from matrimonial property. In the situation of a Family Law property dispute an adult child's inheritance does not go to that child's former spouse.
- Protect assets by
- limiting access to the inheritance by creditors in a situation where the beneficiary could be sued
- limiting the assets available to be used to pay creditors in the event of bankruptcy of the beneficiary
What if a beneficiary does not want the trust?
If your beneficiaries are old enough they can choose either to use the trust or to wind it up.
Who is in control of the trust?
The beneficiaries who are old enough can have full control of their own trusts if they wish. They can control:
- who gets the assets;
- who gets the income;
- how to invest the trust funds; and
- how long the trust is needed etc.
They can give everything to themselves or pass control to someone else at any time if they wish.
What about younger children?
You decide when the younger children gain control of their trust. Up until then your executors are in control. Naturally, until the child reaches the required age, your executor can make funds available from the trust to meet your child's needs.
Who can be trustee of a Testamentary Trust?
You can nominate anyone, including the executors of your will, your spouse or partner, or your children. The trustee has effective control of the trust, so the trustee should be a person who you trust to act in the best interests of those who are to receive the main benefit of your estate that will be 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.
If I left my estate to a Testamentary Trust and my spouse needed the money, would my spouse be able to gain access to it?
If your spouse is a beneficiary of the testamentary trust, the trustee could pay all or part of the capital and/or income to your spouse.
Are there any other advantages of a Testamentary Trust apart from taxation?
Yes. There are several. A testamentary trust could also protect beneficiaries from creditors, or litigants in professional negligence claims and can also protect spendthrift or intellectually impaired beneficiaries. And beneficiaries involved in family court property disputes.
What should I consider before establishing a Testamentary Trust under my will?
There will be ongoing maintenance costs such as accountancy fees for preparation of trust taxation returns. Factors that you should take into account, include a consideration of whether the income generated by your estate would be sufficient to warrant a testamentary trust, or whether there are special needs such as a beneficiary with an intellectual impairment.
Is a Testamentary Trust Different from a Family Trust?
Yes. Although both testamentary and family trusts have similar features, such as the ability of the trustee to decide which beneficiaries of the trust will receive income, there are considerable taxation advantages for infant beneficiaries (for those under the age of 18 years) under a testamentary trust. Even if testamentary trusts are taxed differently at some future date, there may still be significant tax or other advantages to your beneficiaries if you include a testamentary trust as an option.
If you have a beneficiary who has an intellectual impairment, you could leave part of your estate for that person's benefit by naming that person as the primary beneficiary (but not a trustee) of a testamentary trust. This will prevent unscrupulous persons from taking advantage of the beneficiary with an impairment and protect his or her share of your estate. Either a family member, professional adviser or a trustee company could be named as the trustee of this type of testamentary trust.
What if I already have a Family Trust?
The assets of your family trust will not form part of your estate. If all assets are presently owned by your family trust, there would be no point in establishing a testamentary trust unless you planned to wind down your family trust and transfer the assets in it to yourself. It would be sufficient to ensure that control of the family trust offers your death
What advice should I obtain before deciding to establish a Testamentary Trust?
You should consult your accountant, solicitor and/or financial adviser, to ensure that you are aware of all the advantages and disadvantages (some of which will undoubtedly depend on your own particular circumstances, both financial and family, before you make your decision).
Alternatively, a testamentary trust can simply be included as an option in your will to cater for future changes in your circumstances or those of your beneficiaries.
What will it cost?
After reviewing your situation and instructions we will provide you with a costs disclosure before doing any work for you.
There is no obligation if you decide not to proceed after receiving our costs disclosure.
For advice on Wills and Estates and Testamentary Trusts, please call or email:
