Wills incorporating a Testamentary Trust

Wills incorporating a Testamentary Trust: An Overview

Trusts are a major area of the law that has existed for hundreds of years. A trust structure documents and regulates the relationship between the legal owner of property (referred to as ‘the trustee’) and the beneficial owner (referred to as ‘the beneficiary’). Although the trustee is the legal owner of the property, they are entrusted to maintain and manage the trust property for the benefit of the beneficiaries.

A Testamentary Trust is just like any other trust structure that you can create during your lifetime, however as it is drafted into a Will, it is only activated upon the death of the willmaker. Where appropriate, a Testamentary Trust can provide many benefits to your beneficiaries and is a valuable tool to help achieve your estate planning goals.

Is a Testamentary Trust necessary?

A testamentary trust isn’t necessarily suitable for everyone; however they are valuable in the following circumstances:

  1. where the estate is large (taking into account life insurance proceeds and superannuation death benefits);

  2. when potential vulnerable beneficiaries require additional protection; or

  3. where provisions regarding the control of family entities  (such as existing family trusts or companies) are required.
Benefits of a Will incorporating a Testamentary Trust

Where appropriate, Testamentary Trusts offer a wide range of benefits. Some of the benefits of having a Testamentary Trust within your Will are:

  1. Additional Asset Protection – a testamentary trust adds a layer of protection to the assets received by the beneficiaries from claims from creditors, or claims made as a result of a breakdown in a relationship. Additionally measures, such as multiple beneficiaries, independent trustees and appointors, and restrictions on the access to the trusts’ capital or income, can further enhance the asset protected afforded.

  2. Consistent control – a testamentary trust assists in the smooth transition of control and the continued operation of other legal structures (such as family trusts or companies carrying on business activities) which will continue to operate after the willmaker has died.

  3. Capital Preservation – testamentary trusts lend themselves to the preservation of capital for future generations by collecting and maintaining the assets built up over a lifetime within the one structure as opposed to dividing them and distributing them. Additionally, testamentary trusts can offer greater capital preservation across generations by restricting the access to a large amount of capital or income from vulnerable beneficiaries.

  4. Tax effective – testamentary trusts allow for income streaming to minor beneficiaries, who can receive income distributions from a testamentary trust and are treated as adult taxpayers, meaning they are eligible for the tax-free threshold for any income received. This can lead to tax effective financial outcomes.
Types of Testamentary Trusts

There are many different types of testamentary trust, and a Will can incorporate multiple types of testamentary trust as required. Some of the main types of testamentary trusts are:

  1. Discretionary Testamentary Trust – distributions and administration of the trust is entirely at the discretion of the Trustee, who can determine who can receive what,  and when.

  2. Capital restricted testamentary trusts – these testamentary trusts restrict a beneficiary, or a class of beneficiary, from accessing the capital of the trust until certain conditions have been met (i.e. until the beneficiary attains a certain age).

  3. Special Disability trust structure – this type of trust allows for the provision of the future care and accommodation needs of a beneficiary with a severe disability without impacting on their social security benefits by allowing an asset test assessment exemption available to the principal beneficiary.

If you would like to discuss the possibility of including a testamentary trust in your Will and the benefits it could provide to your loved ones, we offer a complimentary initial consultation and would welcome the opportunity to discuss this further with you in detail.

Comments are closed.