Testamentary Trust – Do I Need One?

09 MAY 2022

 

Preparing a Will is usually a task that is on the “to-do list”, but for various reasons takes longer than it should to actually attend to. Sometimes the delay is caused by the reluctance to think about mortality, and sometimes it is because the personal circumstances are complex and it moves from the “to-do list” to the “too-hard basket”.

Preparing a Will is like most tasks that people delay, once you start process, it is nowhere near as difficult as it first appeared. The key to making this process as easy as possible, is of course, getting the right advice. It is particularly important to get clear advice when your circumstances are more complex, and a Testamentary Trust may need to be considered.

What is a Testamentary Trust?

A Testamentary Trust is a discretionary trust created by a Will which can offer asset protection and tax benefits. Unlike a discretionary trust created during your lifetime, a Testamentary Trust will only come into existence upon the death of the Testator (the Will maker). The assets of the Testator are held in the Testamentary Trust and are controlled by the Trustee. The beneficiary has no actual entitlement until the Trustee, at their discretion, distributes all or part of the assets to the nominated beneficiary. A Testamentary Trust can last up to 80 years from the date of death allowing for greater control over your assets to potentially benefit two to three generations. 

What are the benefits of a Testamentary Trust?

The two key benefits of a Testamentary Trust include asset protection and taxation benefits. 

In terms of asset protection, a Testamentary Trust can protect beneficiaries who are in occupations where negligence or other claims are a risk or the beneficiary is experiencing solvency issues. This is because the assets are held by the Trustee on trust and the beneficiary has no entitlement to a distribution until the Trustee sees fit which protects the assets from any creditors or claimants. Under a simple Will, an insolvent beneficiary will have no choice but to pass their inheritance over to their creditors. It can also protect your assets when there are concerns a beneficiary is financially irresponsible, suffers from a drug dependency or excessively gambles as the Trustee has discretion as to the distribution they receive. 

Additionally, a Testamentary Trust can provide asset protection where one spouse decides to remarry upon the death of their partner as the assets can be protected for the benefit of the nominated beneficiaries (for example, the deceased’s children and grandchildren). Whilst a Testamentary Trust may be regarded as a financial resource and impact on the terms of a property settlement, it has the advantage of not being considered a family asset during family law litigation in the context of marriage breakdowns. It also cannot be subject to a Will change on the death of the beneficiary since it is not considered part of their estate. 

A Testamentary Trust can also be considered where there are family law proceedings on foot, or there is potential for family law proceedings. A Testamentary Trust that has been created with careful and proper consideration, and subsequently administered correctly, can assist in providing asset protection during a relationship breakdown of a beneficiary. The can prevent the assets of the Testator also being dragged into a property settlement discussion between separating couples.

In terms of taxation benefits, under a Testamentary Trust, the income distributed to the beneficiaries is taxed in the hands of the beneficiary, meaning, if a person has a child that does not have any other taxable income, they can distribute $18,200 tax free to the child because that is the individuals tax free threshold. 

These are some of the benefits of including a Testamentary Trust in your Will, however it is always important that you consider your own personal circumstances. The details above are general in nature, and should not be taken as specific advice. You should always seek proper advice before acting with respect to your Estate Planning documents.

If you are considering a Testamentary Trust, we recommend you contact our Estate Planning team who can assist you with the preparation of your Will and Estate Planning documents.

To discuss your Estate queries, please contact our Estate Planning Department on 02 4626 5077 or via email at kwolthers@marsdens.net.au.

The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.

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