To many, trusts may seem abstract and abstruse. Yet, they can be essential in ensuring your assets are protected and appropriately distributed to your love ones after you are gone. This insight looks at testamentary trusts, their benefits and how you can establish one in your will. If you think a testamentary trust is right for you, please contact us at Standard Law Co and we will assist you in including provisions to establish a testamentary trust in your will.

What is a Testamentary Trust?

To start, a trust is an obligation enforceable in equity whereby one or more persons (trustee) holding proprietary rights in respect of certain assets undertake to account for the said trust property or to deal with it exclusively in the best interests of a defined class of beneficiaries.

A testamentary trust is a type of trust that is created by a will. It does not come into force until the death of the testator (the person making the will) and can continue for 80 years. When this occurs, the assets of the testator are transferred to the trustee, or executor, of the trust. The assets can be specified in the will, a designated portion of the estate or the remainder of your estate. The trustee will deal with those assets at their discretion but must act within the rules of the trust deed (which are included in the will). You can have more than one trust in your will.

Beneficiaries of a testamentary trust are usually the spouse and/or descendants of the testator. Usually, the trust is discretionary, meaning the trustee will decide which of the beneficiaries, if any, will receive any income or capital from the testamentary trust and the amount that they will receive. Of course, trustees must act according to terms of the trust deed. You can decide how the assets of the trust are to be dealt with and what the trustee can and cannot do.

What are the benefits?

Asset Protection

In drafting your will, the two most common ways to give assets to beneficiaries is to directly distribute ownership to them or to place them in a testamentary trust, with the income distributed regularly and ownership passing much later. As you might guess, a testamentary trust is essential for asset protection and ensuring your assets are dealt with according to your wishes.

For example, your testamentary trust may be in favour of your children, with income from the trust used for your children’s education and general upkeep of their livelihoods. How the income is to be dealt with is prescribed in the trust deed. If your partner remarries, this income cannot be misused by them or their new spouse. The trust will continue even if your spouse passes away. In contrast, if your assets are distributed to your partner upon your death, they can be dealt with however that person sees fit. There is no ongoing rule as to how the money is to be used.

This kind of trust is also beneficial for testators with disabled children, who will need ongoing care after their parent has died. Similar to the scenario described above, a testator can set up a trust with provisions to ensure their child is cared for properly. They can make decisions in the trust deed as to the facility the child is to be placed, the monthly allowance for their care and other provisions that ensure they live a fulfilled life.

A final example is of beneficiaries who may be in high-risk professions. Assets in a trust are protected against any claims of negligence attracting monetary penalties.

Length / duration

A further benefit of a trust is their length. A testamentary trust can exist for up to 80 years. This means that it could benefit two or three generations of a testator and how these generates are distributed income is entirely flexible. Further, a trust can be dissolved at any time.

Evidently, it is crucial that you appoint a trustee that you trust. It can be a loved one, solicitor or the Public Trustee. The trustee distributes, at their discretion, income to beneficiaries and chooses when to distribute all or part of the assets.

Tax benefits

The final benefit to be discussed are the tax implications of using a testamentary trust. Most importantly, a trust does not pay tax on income it distributes. Further, a trustee can distribute income to beneficiaries in a way that takes advantage of the beneficiaries’ individual marginal tax rates. Beneficiaries do need to pay tax on this income.

There are also tax benefits for child beneficiaries. If an inheritance is distributed directly to a beneficiary at the time of their parent’s death, the child must pay tax on the income from the inheritance at the top marginal tax rate. Under the testamentary trust, children are taxed as normal taxpayers, starting at the lowest tax rate. This can make a considerable difference in tax payments, especially if the child is not earning any other income, as they may be eligible for the low-income tax offset.

How can you set one up?

If a testamentary trust sounds right for you, please get in touch with our lawyers at Standard Law Co. We can assist you in drafting your will to include these provisions. We will ensure that they are tailored to your situation and meet your needs.