What is a Testamentary Trust?

A trust describes an ownership structure where the assets of the trust are owned by one person or organisation (being the trustee) but held for the benefit of other individuals or organisations (being the beneficiaries). A testamentary trust is a trust created in your Will but does not take effect until your death. A testamentary trust may be created using specific assets, a designated portion of your estate or the entire remaining balance of your estate. One Will can create multiple testamentary trusts.

What is a Testamentary Discretionary Trust?

A testamentary discretionary trust provides the trustee with discretionary powers. The trustee has the discretion to distribute capital and income between a group of beneficiaries named in your Will. The following are some advantages of a testamentary discretionary trust:

  • Flexibility – the trustee may distribute capital and income to any nominated beneficiary at any time and in any proportion. Also, the trust can be wound up at any time or kept open for an extended period of time and this gives the beneficiaries flexibility and control over when they receive their inheritance.
  • Protection of assets – as the assets form part of a trust, they cannot be taken out of the trust without the trustee agreeing to distribute them to the nominated beneficiaries. None of the assets are legally owned by the beneficiaries, which may protect the assets of the trust from creditors, legal proceedings in the event of marital breakdowns, spendthrift or intellectually impaired beneficiaries.
  • Taxation – taxable income generated by the trust can be distributed among the beneficiaries in the best tax effective manner. Although it is uncertain as to how the Federal Government will tax trusts in the future, there may still be significant tax or other advantages to your beneficiaries, particularly those under the age of 18 years, for you to consider including a testamentary trust as an option in your Will.
  • Capital Gains Tax – the ability to distribute capital gains to minors in a tax effective way. In addition, a further CGT discount may apply where a trust asset has been held for at least 12 months.
  • Income tax streaming – the ability of trustees of non-fixed testamentary trusts to stream income to difference beneficiaries.
  • Incapacity – in the event that a beneficiary is temporarily incapacitated, a testamentary trust will enable the assets of the trust to be managed by the family for the benefit of beneficiaries, rather than having control passed to an external agency.

Who should be the Trustee of a Testamentary Trust?

As the trustee has effective control of the trust, the trustee should be a person whom you trust to act in the best interests of the beneficiaries of the whole or that part of the estate that will be left subject to the testamentary trust. You might choose the executors or your Will, your spouse/partner or your children to be the Trustee. You can, for example, make each of your main intended beneficiaries the trustee of their own testamentary trust.

Do I still need a Testamentary Trust if I have created a Family Trust in my lifetime?

If all of your assets are presently owned by your family trust there would be no point in establishing a testamentary trust as the assets of your family trust will not form part of your estate.

What are some of the pitfalls of a Testamentary Trust ?

Some possible implications to be considered are:

  • Ongoing administrative issues involved in maintaining a trust, such as accountancy fees incurred to prepare the trust’s annual account and tax returns.
  • Whether the income generated by your estate will be enough to justify setting up a testamentary trust.
  • Whether all of your assets are owned jointly with another person or by a family trust. If so, there may not be enough assets in your own name to make establishment of a Testamentary Trust worthwhile.
  • Taxation issues which may arise as a consequence of assets being retained in a testamentary trust.

To avoid the pitfalls you can include a Testamentary Trust as an option only your Will to cater for future changes in your circumstances or those of your beneficiaries so that they can determine whether a testamentary trust is right for them.

Why do I need advice?

There are many possible scenarios and circumstances that need to be considered to ensure that the most appropriate structure is established for you to meet the needs of your loved ones upon your death.

Our experienced solicitors at Solari & Stock can guide you through this often difficult area to ensure you and your intended beneficiaries obtain the full benefit of a properly prepared Will incorporating, if appropriate, testamentary trusts.