Testamentary Trusts: everything you need to know

Testamentary Trusts: everything you need to know

Life is like a box of chocolates — you never know what you’re going to get – Forrest Gump

Death, on the other hand, is a little more predictable despite Woody Allen’s announcement that he’s “strongly against it”. As with anything inevitable, planning helps, and if you have a significant estate, a testamentary trust is the way to go.

“A what?”, you ask.

Please, let me explain.

What is a testamentary trust?

Usually, a Will sets out how you want your assets distributed when you die. But a testamentary trust allows your appointed trustee to manage your assets on behalf of your beneficiaries, for example your children or charities. This can happen over a much longer period. The trustee:

  • Manages your trust assets
  • Invests your trust assets
  • Makes distributions to your beneficiaries according to the terms of the trust

What are the advantages of a testamentary trust?

There are many advantages of a testamentary trust over a normal Will, including:

Asset Protection

Testamentary trust assets can’t be claimed by a creditor in bankruptcy or by parties if one of your beneficiaries falls foul of litigation.

Protection from divorce claims

Testamentary trust assets can, in some cases, be excluded from the marriage assets and not claimable by the other party in a divorce.

Tax effectiveness

A trustee can split the income of the trust and can choose to distribute to the income to beneficiaries who are taxed at the lowest rates.

There’s no capital gains tax (CGT) on assets which you owned at your death when those assets are transferred from your testamentary trust to a beneficiary. However, CGT will apply in other circumstances.

Protection of beneficiaries

You can leave your trustee with detailed instructions about how to care for disabled or financially irresponsible beneficiaries.

How do I appoint a trustee?

Think long and hard about who you choose to act as the trustee because it’s a big decision. They can be an individual trustee (friend or relative) or a professional trustee (usually a company). In some situations, you might prefer to engage a professional trustee. For example:

You don’t have any suitable family members or friends

Not everyone will have the sort of financial awareness, astuteness, acumen and investment capabilities needed to properly manage and administer your trust assets.

To avoid family disputes

This is a good option if your trustee needs to remain objective and impartial. For example, an individual trustee might find it difficult to distribute the trust assets if he or she has a close and personal relationship with some or all of the beneficiaries. It could also be uncomfortable for an individual trustee to act if there’s bad blood between family members.

Your situation is complicated

If your tax scenario is very complex or your beneficiaries form part of a blended family, your trust can be complicated and sometimes best left in the hands of a professional.

What are the disadvantages of appointing a professional trustee?

While a professional trustee may be right in certain circumstances, don’t appoint one for fear of burdening family or friends with a time-consuming role after your death. In the long term, the role of trustee actually allows them to retain control over your trust. However, the disadvantages of a professional trustee include:

They’re not cheap

While professional trustees take a percentage of the trust or charge a minimum fee, individual trustees generally perform their duties for free. And while trustees must act in the interests of the beneficiaries, in a limited sense, professional trustees are “exempt” from this because they are allowed to draw fees under Victoria’s trustee laws. These fees would have otherwise been available to the beneficiaries.

They’re distant or removed

Professional trustees prefer to deal in cash and securities. When dealing with other assets, like a family business, a professional trustee may lack the inside working-knowledge of that business and decide to sell it. Also, they may be too removed from your spouse, disabled family member or favourite charity to properly fulfil your wishes.

Loss of control

A professional trustee has decision-making powers over your trust and may make decisions that upset your beneficiaries.

What’s the final word about testamentary trusts?

There are many factors influencing the best testamentary vehicle for you, whether it’s a basic Will or a testamentary trust with an individual or professional trustee. Contact us to learn more about testamentary trusts. 



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.