A testamentary trust can be a powerful tool for protecting assets and providing for beneficiaries of a deceased estate.
What Is a Testamentary Trust?
A testamentary trust is a type of trust that is created by a person’s Will and comes into effect only after their death. It does not exist while the person is alive. A testamentary trust sets out how the deceased’s assets are to be managed and distributed for the benefit of specific beneficiaries.
The executor of the Will will oversee the establishment of the testamentary trust, and a trustee is appointed to manage the trust assets according to the terms set out in the Will.
A testamentary trust can last for many years. The exact duration will be set out in the terms of the trust; often, a testamentary trust will have a vesting date which is some decades after it comes into effect or upon the beneficiaries of the trust reaching a certain age.
Types of Testamentary Trusts
There are two common forms of Testamentary Trust:
Discretionary Testamentary Trust: The trustee has discretion over how and when to distribute income and capital among the beneficiaries. This allows for flexibility and potential tax minimisation.
Protective Testamentary Trust: Designed to protect vulnerable beneficiaries, such as those with disabilities or those who may not manage money responsibly. These trusts may be very prescriptive about how the trust assets can be applied and when.
Benefits of a Testamentary Trust
There are some benefits to a testamentary trust, including but not limited to:
Asset protection: The trust's assets can potentially be protected from claims by creditors or financially irresponsible beneficiaries. There may also be some protection from estranged spouses of a beneficiary; however, this will be case-by-case dependent and not guaranteed.
Tax advantages: Income distributed from a testamentary trust to minor children is taxed at adult rates, not at the higher penalty rates that typically apply to income distributed to children. This can result in tax savings for families. Please note that this is not financial/taxation advice, and a person seeking to establish a testamentary trust should also consult with and obtain specialist taxation advice.
Control over distribution: Through a testamentary trust, a person can specify when and how beneficiaries receive assets, which is useful if it’s not intended that young or vulnerable individuals have access to lump sum assets immediately.
Estate planning flexibility: Testamentary trusts allow for the ongoing management of wealth throughout multiple generations. This can be helpful if a person wants to try to retain assets within the family.
While testamentary trusts offer many benefits, they also come with responsibilities and potential complexities. Trustees of a testamentary trust have legal obligations and may need to file tax returns for the trust. When identifying who the trustee will be, a person needs to carefully consider who will be able to carry out the role. It is also important to seek independent legal advice from an experienced estate planning lawyer when establishing a testamentary trust; it’s important that the terms of the trust (which are contained in a person’s Will) correctly reflect the deceased’s intentions, or there can be long-ranging consequences.
Contact Robinson + McGuinness to arrange an appointment on (02) 6225 7040, by email on info@rmfamilylaw.com.au, or get started now online with one of our experienced lawyers.