One of the most loving things you can do for your family is to make plans for what happens after you die. This is particularly important if you have children or vulnerable adults who depend on you financially. A testamentary trust may be the right tool to help you look after those you love.
What is a testamentary trust?
As the name suggests, a testamentary trust is made under a will and begins at the death of the testator (the will-maker). This tool allows you to financially support someone without giving that person direct control of the assets.
How is a testamentary trust made?
Your solicitor drafts your trust. Before speaking to your solicitor, you should think about what you want to include in the trust (the assets or capital), who you want to benefit from the trust (the beneficiaries), and who you can rely on to carry out your wishes (the trustee or trustees).
A common arrangement for parents of young children is to place all assets, including property and superannuation, into a trust for the benefit of their children. In that scenario, the trustees may also be nominated as the guardians of the children.
Who should you choose as a trustee?
The trustee is the legal owner of the assets of the trust, so it is important to ensure the trustee is reliable and honest. Appointing more than one trustee can provide protection against fraud or carelessness.
In some cases, the size or complexity of an estate may justify appointing a professional trustee. A trustee can be an individual professional (such as an accountant or lawyer) or an organisation such as the
NSW Trustee and Guardian. A professional trustee must be paid from the estate.
What are the advantages of a testamentary trust?
A testamentary trust allows a will-maker to control the distribution of their assets for up to 80 years. This allows you to look after your children, grandchildren, and even great-grandchildren. There are many advantages to this arrangement.
Protection
A testamentary trust can be structured with clear rules. You can set out how your money is divided between beneficiaries, when distributions are made, and what the funds can be used for. This helps prevent assets being wasted by beneficiaries experiencing vulnerability, such as addiction or mental health issues.
Because the trustee legally owns the assets, trust funds are generally protected from claims against beneficiaries. For example, the trust is usually not affected by family law proceedings, meaning the capital is less likely to be divided in a divorce. The assets are also generally protected from bankruptcy, personal injury, and professional negligence claims.
Flexibility
You can structure your testamentary trust as a discretionary trust. In this case, the trustee has flexibility in distributing income and capital. For example, the trustee may adjust distributions based on each child’s needs over time. This allows the trust to adapt as circumstances change.
Minimise Tax and Capital Gains
Testamentary trusts may provide tax advantages, which should be discussed with your solicitor and accountant. Trustees may distribute income in tax-effective ways and take advantage of concessional tax treatment for minor beneficiaries. Capital gains tax outcomes may also be more favourable in some cases.
Are there any disadvantages to a testamentary trust?
A testamentary trust is not suitable for everyone.
A trust involves ongoing administration costs, including tax returns, accounting, and potentially trustee fees. For this reason, a testamentary trust may not be appropriate for smaller estates.
A trust may also be challenged by beneficiaries who want immediate access to their inheritance. Even unsuccessful claims can create legal costs and family conflict. Ongoing interaction between trustees and beneficiaries may also create tension.
Income from a trust is included when assessing eligibility for Centrelink income support. However, trust assets are generally not included in the asset test. More information can be found on the
Services Australia website.
Conclusion
There are many benefits to using a testamentary trust to protect your loved ones. This estate planning structure helps protect your estate from outside claims and ensures your wealth benefits those you choose. However, there are also disadvantages, so you should speak with your solicitor and accountant before deciding whether it is appropriate for you.
This information is general only and we recommend you obtain professional advice relevant to your circumstances.
If you or someone you know wants more information or needs legal help or advice, please contact us on
02 9949 4022 or email [email protected].