Looking after your babies and fur-babies – Testamentary trusts for your loved ones who are unable to look after themselves.
Testamentary trusts for minor children
In our article on Guardians – Estate Planning for your Children, we discuss that minor children (that is, children under the age of 18 years) cannot receive outright gifts in your Will. However, rather than waiting until a child turns 18 years old to receive any benefits from your Estate, a testamentary trust can be set up so that the intended gifts can be used for the benefit of your minor children.
The testamentary trust can include specific provisions in your Will to deal with the inheritance. Your Will, which becomes the trust document upon your passing, appoints an Executor / Trustee to hold property on trust, manage and invest funds whilst your child / children are minors, and to distribute income and / or capital from the trust as and when required.
For that reason, testamentary trusts can range from simple to highly personalised. The relevant roles you will need to consider include:
- The Primary Beneficiary
This is the party with the primary entitlement to benefit from the trust, and any further beneficiaries are classified based on their relationship to the Primary Beneficiary.
In these circumstances, your minor child will be the Primary Beneficiary.
- The Trustee
This is the party with day-to-day control of the trust. This party makes investment decisions, pays debts and expenses, and determines how the income and capital of the trusts should be distributed, to whom and when (in accordance with the terms of the trust).
In these circumstances, this could be the Executor of your Will, your intended testamentary guardian who would be responsible for your minor child’s on-going care, or any other person that you feel would be suitable to manage the gift you have left for your minor child.
- The Appointor
This is the party who can appoint or remove the Trustee. They are sometimes called the “controller” of the trust. Nevertheless, holding this role does not give full power over the trust, because the Appointor has no power to make distributions or to end the trust as these powers are held by the Trustee.
The Appointor can appoint themselves as Trustee of the trust, meaning that the offices of Appointor and Trustee can be combined into one person, at the discretion of the Appointor.
In these circumstances, this would likely be the same party you have appointed as the Trustee, but it can be any person you feel would be appropriate to have ultimate “control” of the trust.
- The General Beneficiaries
These are the parties who can also benefit from the trust, generally through their relationship to the Primary Beneficiary. This enables distributions of trust income and capital to these parties in addition to the Primary Beneficiary at the discretion of the Trustee, which can have tax advantages.
This group can be as small or large as you would like, but in these circumstances, General Beneficiaries may include:
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- Surviving parent of the Primary Beneficiary
- Grandparents of the Primary Beneficiary
- Siblings of the Primary Beneficiary
- Often where you are establishing testamentary trusts for your children, they will either each have their own trust, or all the children are Primary Beneficiaries of the single trust, but this will depend on the specific circumstances.
- Children of the Primary Beneficiary
- Grandchildren of the Primary Beneficiary
- Estate of the Primary Beneficiary
You may now be wondering, why would you need to include children or grandchildren of the Primary Beneficiary as General Beneficiaries of the testamentary trust when the Primary Beneficiary is currently a minor child and too young to have children or grandchildren of their own?
Once a testamentary trust has been established, it can continue to operate after your children have turned 18. It is often very useful for the trust to continue to provide the tax advantages noted above, along with protection against third party claims against your children (such as family law proceedings or business-related disputes they may be involved in), and trusts are generally useful vehicles for investment and passing wealth to the next generations.
You can also include provisions in your Will to direct that the Trustee of the trust resign once your child turns 18 so they can assume this role themselves, or to direct the Appointor to appoint your child as the successor Appointor once your child turns 18.
Testamentary trusts for pets
Pets often have a special place in our lives, and it is also possible to include a testamentary trust in your Will for the benefit of your animal companions.
In one such matter our Team was involved in, a testamentary trust had been established for the deceased’s prized show dogs. The Will first gifted the dogs to friends of the deceased who shared their passion for breeding show dogs and established a trust which provided $50,000 to be held by the Executor, with periodic distributions to the new owners for the lifetime of the dogs. The trust also permitted further payments at the Executor’s discretion as needed to ensure the dogs are kept healthy, and also to maintain that particular line of show dogs through on-going breeding and continued registration.
It’s important to note that pets are legally property that you own. When leaving a gift for the benefit of a pet, some key considerations include:
- Who do you want to be responsible for the on-going care of your pet?
You would need to leave your pet to this person, let’s call them the Carer, and directions could be included within the testamentary trust as to how you wish you pet to be cared for.
- What do you want to leave as a gift for the benefit of your pet?
For a testamentary trust to be suitable in these circumstances, it’s likely this will be a sum of money, in which case it’s a question of how much you want to allocate for this purpose.
- How are funds held for the benefit of your pet to be used?
Let’s say you leave $50,000 for the benefit of your pet like the example provided above; how can you ensure these funds will be applied for your intended purpose?
One option is to make your Executor the Trustee of this testamentary trust, and have the Carer be the recipient of any funds distributed from the trust so they can use these funds for the care of your pet.
You may also want to consider whether the Carer would ask the Trustee for funds as the need arises, or the Trustee provides the Carer with periodic payments for the care of your pet. Like the example provided above, you may want to allow for both options in case the periodic payments are insufficient from time to time, like if your pet requires expensive veterinary care.
- What happens if your pet dies before the funds are all used?
If there are funds remaining when your pet dies, you may wish to have the remaining funds pass to the residuary beneficiaries of your Will, or perhaps leave the funds to a charity for animals.
For those unable to look after themselves such as minor children and pets, their future care is an important consideration that you may wish to provide for in your own estate planning. Our Wills & Estates lawyers can provide advice on all aspects of your estate planning, including the preparation of Wills to include testamentary trusts for your children or pets. To find out how our Wills and Estates legal team can assist you contact us today on +61 3 9822 8588 or email us HERE.
