What is a testamentary trust?
Generally, a trust describes an ownership structure where the assets of a trust are owned by one person or organisation (the trustee) but held for the benefit of other individuals or organisations (the beneficiaries).
Trusts are created in a wide range of situations. The can be a useful structure for both families and businesses.
For example, a lot of people have family trusts (also known as an inter vivos trusts). These are created by a deed and commence during your lifetime.
In contrast, a testamentary trust is created in and by your will. It does not come into effect until your death.
A testamentary trust may be created under your will, using:
- specified assets
- a designated portion of your estate
- the entire remaining balance of your estate.
Testamentary trusts take many forms, including:
- a life tenancy
- a life interest estate
- a trust for minors
- a trust for protected beneficiaries
- charitable trusts.
What are some of the advantages of setting up a testamentary trust?
A testamentary trust enables you to control when and how your beneficiaries will receive their inheritance.
It is designed to provide maximum flexibility and allow for tax effective distribution of capital and income, as well as providing possible protection for your beneficiaries from third parties such as creditors.
For example, you may wish to set up a life-interest benefit for your beneficiaries. This allows a person to benefit from an asset for the rest of their life, but without ultimately inheriting it. A beneficiary could live in a property, receive rental income from a property or earn the return on invested funds for the rest of their life. After the beneficiary’s death, you could ensure the trust assets could pass to other family members, charities, or whatever you specify in your will.
- It can offer wealth protection if they become bankrupt or go through a marriage breakdown (because it legally separates the inherited assets from the personal assets of the beneficiaries).
- When an asset passes directly to a spouse, you cannot ensure that your children are protected, especially if your spouse remarries and has other children, and a testamentary trust offers protection against this.
- You may not want to give a child money at an early age and a testamentary trust can help you control when they get access to a particular asset.
- It means you can stagger the gifting of assets over time or tie the release of assets to particular events or uses.
- It enables the trustee to control the distribution of income from year to year, which can be adjusted to take advantage of the lower marginal tax rates of one or more of the beneficiaries.
- It can be used to provide flexibility in relation to capital gains tax and stamp duty.
- It can be used to reduce tax on your superannuation.
What are the different types of testamentary trusts?
There are two types of testamentary trusts:
What is a discretionary testamentary trust?
A discretionary testamentary trust is a trust where the beneficiary has the option to take all or part of their inheritance via a testamentary trust. The primary beneficiary has the power to remove and appoint the trustee, and can appoint themselves to manage their inheritance inside the trust.
What is a protective testamentary trust?
A protective testamentary trust is a trust where the beneficiary must take their inheritance via the trust and does not have the option to appoint or remove trustees. It can be useful in cases where the beneficiary is facing bankruptcy; has matrimonial problems; or has an intellectual disability, meaning they are not able to manage their own finances.
How does Monardo Solicitors approach testamentary trusts?
At Monardo Solicitors, we like to make sure that anyone who is interested in setting up a testamentary trust is aware of both the advantages and disadvantages. Quite often, our clients ask us to estate planning package that meets all their needs. In some cases, this involves including a testamentary trust in a will.
That is why, with clients who are looking to set up a testamentary trust, we like to sit down and talk to them about their situation and explore their options in detail.
If you decide to go ahead, our experienced wills and estates lawyers can prepare you a will that contains a testamentary trust that achieves your objectives.
Are you considering setting up a testamentary trust? Would you like to talk to a lawyer who has experience in this area, and can talk to you about the pros and cons of setting up a testamentary trusts in your will? If so, call our experienced wills and estates team on 02 8006 5244.
Testamentary Trusts FAQs
Who can you appoint as trustee of a testamentary trust?
You can appoint a family member or a friend over the age of 18 years who is an Australian resident to act as trustee.
You may also appoint a professional trustee company.
The trustee is the legal owner of the trust’s assets. They have a duty to manage these in the best interest of the beneficiaries, as outlined in the will.
How long can a testamentary trust operate?
The trust will end at a time, or upon an event, specified in the will. For example, you could specify that the trust ends when the beneficiaries attain a certain age or complete their education.
Alternatively, it could be once a life interest beneficiary dies. At that point, the other beneficiaries (referred to as remainder beneficiaries) inherit the assets.
What factors should I consider before establishing a testamentary trust under my will?
There are a number of issues you should consider before deciding to set up a testamentary trust under your will:
- The cost (there will be ongoing administrative costs involved in maintaining the trust)
- Whether the income generated by your estate would be sufficient to warrant a testamentary trust
- Whether there are special needs, such as a beneficiary with a disability who may not be able to manage their affairs.
If I already have a family trust, can I set up a testamentary trust?
The assets of your family trust will not form part of your estate.
If all your assets are 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.
Do you need help with estate planning? Would you like to talk to a lawyer who has extensive experience in estate planning? Call our experienced wills and estates team now on 02 8006 5244.