Testamentary trusts can be a powerful tool when considering how you wish to distribute and protect your assets after you’re gone.
Simply put, a testamentary trust is a trust established by a valid Will which comes into effect upon the death of the Testator (the person who made the Will). The parties to a testamentary trust are:
- Testator: the person who creates the trust as part of their Will,
- Trustee: the person responsible for managing the trust assets and carrying out the terms of the trust, and
- Beneficiary: the person (or people) entitled to receive the benefits of the trust.
People generally include testamentary trusts as part of their Will for a specific purpose, with the overarching reason being to control the future use or disposition of assets. These trusts are highly customisable, allowing the Testator to designate the Trustee and the beneficiaries, and to specify how the assets will be managed and distributed by the Trustee. In essence, this means that the assets of the estate are not transferred to the beneficiaries directly, but instead held in the trust fund for the benefit of the beneficiaries.
Considering a Testamentary Trust
There are numerous reasons why one might consider including a testamentary trust in their Will. One of the primary reasons is to extend the control over the estate assets beyond the Testator’s lifetime, and in turn to protect the assets from the potential misuse by the beneficiaries. There are also other benefits that arise including: safeguarding the assets from creditors, tax-effectiveness, and increasing the long-term value of the assets through continued investment.
Different Forms of Testamentary Trusts
There are many different forms of testamentary trusts that can be created in a Will, depending upon the individual circumstances and wishes of the Testator. Some of the most common forms of testamentary trusts include:
- Trusts for minor beneficiaries – these are the simplest and most common form of testamentary trust. They arise where the Testator specifies in their Will that they don’t want a child to receive their inheritance until they attain a certain age. If the Testator dies before the beneficiary attains that age, then that beneficiary’s entitlement under the Will is held on trust until that age is attained.
- Trusts for disabled or otherwise vulnerable beneficiaries – testamentary trusts can be used to protect the entitlements of beneficiaries who may not have the capacity to manage the assets on their own, or where there is a risk that these beneficiaries may be taken advantage of. In these circumstances, the Trustee is responsible for managing the trust assets and making funds available to provide for the beneficiary’s essential expenses.
- Charitable trusts – where a Testator is leaving a large gift to charity in their Will, they may wish to set up a perpetual charitable trust. The trust funds are invested, and an annual distribution made to the charity or charities that the Testator wants to support. Over time, the amount received by the charity will be more than if they received a direct gift in the Will.
- Discretionary Testamentary Trusts – these trusts operate much like a family trust and are primarily used for asset protection and tax efficiency purposes.
Advantages of a Testamentary Trust
- Protection of Assets
One of the primary advantages of a testamentary trust arises from the separation between the control of the assets and the benefit from those assets. Because these assets are not transferred directly to the beneficiary, the potential risk of that beneficiary misusing the funds is alleviated. The assets are also protected from any legal action involving the beneficiary, including family law (to some extent) and bankruptcy proceedings.
- Control over Distribution
The Testator can establish specific conditions for distributing assets to beneficiaries. For example, the trust can be set up to disburse funds for education, healthcare, or other life events. This ensures that the Testator’s wishes relating to the eventual application of their assets are respected.
Testamentary trusts can be tailored to fit the unique needs of the Testator and their beneficiaries. They can address complex family structures, charitable intentions, and a wide range of financial scenarios. Furthermore, a testamentary trust can be regularly modified in accordance with the wishes and instructions of the Testator whilst alive.
- Tax Efficiency
Testamentary trusts can offer tax advantages, depending on the jurisdiction and specific circumstances. They may help reduce the tax burden on the estate and beneficiaries, as well as facilitate the transfer of wealth across generations with potential estate tax savings.
By providing control, asset protection, tax benefits, and flexibility, testamentary trusts are a vital component of comprehensive estate planning. When considering a testamentary trust, it is essential to consult with an experienced estate planning lawyer who will be able to provide tailored advice on including a testamentary trust that aligns with your personal goals and wishes in your Will.
If you need assistance drafting or updating your Will or you are thinking of whether a testamentary trust is important for you contact our Wills and Estate Planning lawyers on +61 3 9822 8588 to find out how they can help you.