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In the right circumstances, creating a testamentary trust in a will can provide significant advantages for your loved ones
Estate planning is the process of planning for what happens to your property after your death. For some people, this is a straightforward process, requiring only a will. For others, making a will is just one aspect of estate planning. A testamentary trust may be the best approach, depending on the size and nature of the assets, circumstances, beneficiaries and how much control you wish to exercise.
What is a trust?
A trust is an entity that holds assets (for example, money and real estate) for the benefit of the trust’s beneficiaries.
A trust deed establishes a trust. It’s a legal document. The trust deed may set out certain conditions for distributing any assets or payments to the beneficiaries. For example, it may say that a beneficiary is entitled to receive $100,000 from the trust on their 25th birthday. Often, the trustee has the discretion to make payments and distributions to the beneficiaries, subject to the terms of the deed.
A trustee is appointed by the trust deed and can be a person or a company. The trustee has a duty to manage the assets in the best interests of the beneficiaries.
Sometimes, trusts are set up to support charities or for tax reasons.
What is a testamentary trust?
A testamentary trust holds, manages and protects a person’s assets after their death. In addition to money and investments, assets may include other personal items such as jewellery. These trusts are often recommended for people who:
- Have significant assets
- Have complex financial arrangements
- Own a company or business
The trust deed often forms part of the person’s (testator’s) will.
The testamentary trust comes into effect when the testator dies. When this happens, all or part of the estate’s assets transfer to the trust (depending on the testator’s wishes).
This type of trust is discretionary because the trustee decides how to distribute any income or assets (subject to the trust deed in the will).
You may not wish to appoint a company to act as trustee. In that case, you can choose an adult who is likely to act in your beneficiaries’ best interests, for example, your spouse.
The trust comes to an end on the terms set out in the trust deed in the will. This can be a specific event, for example, when a beneficiary dies, or otherwise a maximum of eighty years after the trust started operating.
What are the advantages of a testamentary trust?
Like other trusts, testamentary trusts can have several purposes, including supporting charities or for tax minimisation. However, there may also be other reasons, including:
- To manage assets on behalf of a beneficiary who hasn’t reached the required age of independence. This is often set out in the will’s trust deed, for example, age 21 or 30)
- To manage assets on behalf of a beneficiary who lacks the mental capacity to manage their affairs
- To manage assets on behalf of a beneficiary who may otherwise waste the assets or make unwise financial decisions
- To manage assets in a remarriage or blended family situation
- To specifically provide for something, for example, allocating money to pay for your child’s or grandchild’s education
- To protect assets from legal action, for example:
- Bankruptcy
- Property division proceedings in a divorce or relationship separation
- Legal action by someone who believes they’re entitled to a share (or a greater share) of your estate
- To give a person a life interest in a trust asset, with the trust retaining ownership of the asset. For example, a life interest in a house.
Often, trusts are associated with significant wealth. But if you’re considering a testamentary trust, this is not a prerequisite. That being said, a testamentary trust can help you work out how to deal with a large estate or intricate financial arrangements.
What are the disadvantages of a testamentary trust?
Testamentary trusts may have ongoing expenses, such as legal fees, bank fees, accounting fees, and fees for preparing tax returns. In addition, if you have appointed a trustee company to manage the trust, it will also charge fees. You need to factor in these likely expenses and consider whether the trust assets will generate enough income to pay the fees and make any distributions to the beneficiaries.
On some occasions, the trust will attract taxation. For example, if the trust holds your family home and then sells it. Your trustee may need to seek advice to work out whether capital gains tax will apply.
What else should I consider?
Some other issues to consider are:
- Which assets should be included in the testamentary trust
- Whether to use an individual or company as trustee and who to appoint
- Who will be the beneficiaries of the trust
- Whether the trust has enough money to pay the expenses
- Whether you also need asset planning during your lifetime, for example, a family trust
We will also discuss the provisions of your will and how it will work in conjunction with the testamentary trust. Some issues to consider are:
- Who will be your beneficiaries
- Who will be your executor
- Whether you wish to make any specific gifts
- Whether there are any assets not included in the trust and how to deal with them
- Whether there’s a risk of a claim for a share, or a greater share, of your estate
Testamentary trusts should be planned with painstaking care and attention to detail.
The final word
If you have assets that you’d like to preserve and protect, we recommend that you seek legal advice from our experienced estate planning lawyers. We can discuss your assets and circumstances and help you decide whether a testamentary trust is appropriate.
Contact us for more information about testamentary trusts and wills.
DISCLAIMER: We accept no responsibility for any action taken after reading this article. It is intended as a guide only and is not a substitute for the expert legal advice you can receive from marshalls+dent+wilmoth and other relevant experts.
