A Testamentary Trust is a Trust created in a Will.
Creating a Testamentary Trust in your Will is often an excellent strategy for you and your family, as it allows you to leave assets to a person in a trust structure instead of making a standard or direct gift, and the trust can provide both flexibility and protection for your loved ones..
Where your Will creates a Testamentary Trust, you will need to choose an executor (as you must do in a standard Will) and you will also choose a trustee (which can be the same person as the executor). The trustee will hold money and assets on behalf of the beneficiaries, and has the power to make appropriate distributions at appropriate times. The role of a trustee may last for many years particularly if they are managing the trust on behalf of a minor beneficiary until they reach a certain age.
Advantages of a Testamentary Trust
Testamentary Trusts can be used to protect assets and potential beneficiaries from losing their inheritance to creditors, litigants, a spouse or partner in the breakdown of a relationship and potential future negligence claims.
One of the most significant advantages to establishing a Testamentary Trust within your Will is that your trustee has powers which assist to maximise the benefit your whole family receives from your assets, by taking into consideration greater tax burdens which some beneficiaries might face. Tax must be paid on any income or interest earned from investments using moneys received from a deceased estate at the beneficiary’s own marginal tax rate.
For example, if interest of $40,000 is earned through investments made from estate monies valued at $500,000 a beneficiary may pay tax on that interest of $6,600. However, if the same amount of interest was earned via a Testamentary Trust and split amongst several beneficiaries including minor children then it is possible no tax is payable.
That saving would occur in each and every year the investment is maintained. In addition to this, the tax-free threshold of minor children is significantly higher than that of distributions from discretionary or family trusts.
Other advantages of a Testamentary Trust include if you have a beneficiary, perhaps a child, who has an intellectual disability. Part of your estate could be left for their benefit in a Testamentary Trust thereby protecting your loved one from being taken advantage of.
What assets can comprise the Testamentary Trust?
Generally, only assets which are in a deceased’s personal name can become part of the Testamentary Trust assets. Some assets, such as those held jointly with another person, or held in a family company or family trust, might need to be dealt with in a different way.
It is therefore important for an experienced solicitor to carefully consider the structure of your assets and talk to you about the options for managing all assets after your death. Sometimes you will have a choice about where certain assets will be directed after your death, including many insurance policies and superannuation benefitsIt is crucial that you and your solicitor discuss the best way to deal with each different type of asset after your death.
If you are contemplating making a Testamentary Trust Will you can speak with one of Andersons’ experienced estate planning solicitors to ensure that it is the right model for you, gain a better understanding of how the trust might benefit your family, and discuss how the trust can be tailored to meet your family’s unique needs.
A Testamentary Trust should only be prepared by an experienced solicitor.
