Testamentary trusts are a useful estate planning tool with a number of benefits. A testamentary trust is a trust that is created upon your death using the terms set out in your Will, rather than an inter vivos trust which is created during your lifetime. Instead of your assets being distributed directly to your beneficiaries under your Will, they are distributed into a testamentary trust which is managed by a trustee as chosen by you. Multiple testamentary trusts can be established in your Will, with one trust created per child or major beneficiary of your estate.
Testamentary trusts can be used to protect your assets from your beneficiary’s creditors and from their relationship breakdowns, and can be used to minimise taxes.
Because your assets are not distributed to a beneficiary directly and are instead held by the trustee of the discretionary trust, those assets are shielded from the beneficiary’s creditors and bankruptcy proceedings. This is because the assets are not held in the beneficiary’s personal name, and the trustee must first make a determination to distribute the trust capital or income to the beneficiary.
Similarly, if a testamentary trust is properly established, it may offer some protection from family law property proceedings if a beneficiary was to separate from their partner in the future. However, there must be a clear separation of control and ownership of the trust assets so that the trustee and beneficiary of the trust are different people, in order to have this protection.
Because the assets are held by the trustee rather than the beneficiary personally, it protects the beneficiary’s inheritance from themselves. This is particularly useful if you have concerns about their ability to manage large sums of money, or if they are young, may suffer a disability or require financial assistance.
A testamentary trust provides tax minimisation strategies. A testamentary trust may have one of your children as the primary beneficiary, however additional beneficiaries such as their spouse, children and grandchildren can also be beneficiaries of the testamentary trust. Income of a testamentary trust can be distributed to minor beneficiaries and is generally taxed at adult rates, rather than penalty trust rates applied to inter vivos trusts. This reduces the overall tax burden on the estate and family.
Despite the benefits of a testamentary trust, there are some disadvantages. One is that it has high set up and ongoing costs. A Will that establishes a testamentary trust is significantly more complex and lengthier than a standard Will, and therefore often will attract higher legal costs to prepare at the outset. Because a testamentary trust is a discretionary trust, once it is established upon your passing, the trustee is required to complete annual tax returns and must maintain proper trust account records and will therefore likely incur additional accounting fees.
There is also the risk of family conflict, particularly where a separation of control and ownership of the trust assets is required. Beneficiaries may disagree with a trustee’s investment choices or determinations to make (or not make) trust distributions. Additionally, your beneficiary may have preferred a lump sum payment of their inheritance to put towards payments like significantly paying down their mortgage.
If you have been considering whether to establish a testamentary trust in your Will or would like to discuss whether a testamentary trust is right for your estate plan, Taurus Legal Management can help. We invite you to contact us at info@tauruslawyers.com.au or (03) 9481 2000 to discuss your family circumstances and estate plan today.