You may have heard of the expression Testamentary Trusts. Such Trusts are quite common in Australia although their purpose and the benefits that can be obtained from them are not well understood.
A Testamentary Trust is a Trust created by a persons Will. The Trust comes into existence as a onsequence of the death of the Will maker. Testamentary Trusts can take many different forms. Perhaps the most common is a Discretionary Trust – one where the Trustee has full discretion about who benefits, and to what extent, under the Trust.
There are many forms of Testamentary Trusts and in all cases careful drafting is necessary to ensure that the Trust will give effect to the Will makers intention.
Why Use a Testamentary Trust?
There are many different reasons why people use Testamentary Trusts. It is important to understand the purpose of the Trust in order to ensure that the objects can be achieved. A few of the more common reasons for use of Testamentary Trusts include:
- Asset protection – many people are concerned to ensure that assets remain within the family and are used to benefit particular family members. Often concerns are expressed about the risks of loss of the assets if the intended beneficiary became bankrupt, or if the intended beneficiary was divorced the assets being lost in the family law proceedings. Testamentary Trusts can afford some protection in certain circumstances, although claims that they put assets beyond the reach of the Family Court are not accurate.
- Taxation advantages -depending on the size of the estate, and the age and income level of intended beneficiaries there is potential for significant tax advantages. For example, if there is capacity to distribute income to a beneficiary under the age of 18 then distributions from a Testamentary Trust will be taxed at adult marginal tax rates, rather than the penalty rates that would normally apply to distributions to children. In certain circumstances there are a range of other potential taxation benefits the scope of which is beyond an article of this nature.
- Trusts for protected beneficiaries – it is not uncommon for persons making the Will to be concerned about who will control the assets. In some circumstances this may be because the intended beneficiary is not able, by reason of disability, to manage the assets or their own financial affairs. In other circumstances the concern may be that the intended beneficiary has an addiction problem such that they cannot be trusted to manage the intended gift.
There is no limit to the number of Testamentary Trusts that a Will can create. In some circumstances it may be appropriate to establish a separate Testamentary Trust for each intended beneficiary. Testamentary Trusts can offer persons making a Will significant advantages. Whether those advantages are worth the likely greater administration costs to the estate will depend on the size of the estate and the individual objectives.
We recommend that our clients review their Wills periodically. For most people reviewing their Wills every 5 years is sufficient although if there is a significant change in your circumstances more frequent reviews may be necessary. Next time you are reviewing your Will you may wish to explore whether a Testamentary Trust would be of benefit in your circumstances.
