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The benefits of a testamentary trust in estate planning

Helen Phelps

15 Nov 2017

Topics

  • Wills & Estates
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Are you considering including a testamentary trust in your will? Helen Phelps, Lawyer with Snedden Hall & Gallop, outlines the benefits of creating your will with testamentary trusts.

Testamentary trusts

A testamentary trust is created by a will – the trust only comes into effect on the death of the testator (will maker). The trustee holds property for the benefit of the beneficiaries. There are different types of testamentary trusts:

  • Discretionary testamentary trusts
  • Special disability trusts
  • Protectionary discretionary trust
  • Charitable testamentary trusts

The most common type of testamentary trust is a fully discretionary testamentary trust – also known as a discretionary family trust. This article takes a closer look at this type of trust structure.

Discretionary testamentary trust

Traditional ‘simple’ Wills for a married couple with children provide for the partners giving their full estate to each other as an absolute gift in the first instance and then to the children as substitute beneficiaries. Discretionary testamentary trust structures give the beneficiaries the option to take part or all of their inheritance via a trust structure and can be set up to allow inclusion of superannuation into the trust structure.

The testator is able to create the terms of the testamentary trust. The trust may limit the activities of the beneficiaries with the assets of the trust or provide them complete control. The testator is able to determine who will be the office-bearers and beneficiaries of the trust and can even create several trusts to allow individual trusts for each primary beneficiary, allowing each beneficiary to independently manage their own inheritance.

Benefits of testamentary trusts

There are two main advantages of discretionary testamentary trusts – asset protection and tax benefits.

Asset protection

One of the main reasons people create testamentary trusts is in an attempt to protect assets or inheritances generally.

  • In the event of a relationship breakdown, the assets held in the trust may be held to be separate from the assets of the relationship. While asset protection cannot be guaranteed there is a higher level of protection than that provided to absolute gifts made by way of a simple Will.
  • A testamentary trust can be structured in such a way to limit the control the beneficiary has over the asset, which can protect against waste or irresponsible dealings while allowing the beneficiary to enjoy the use of or income the asset.
  • Mechanisms are built into the discretionary testamentary trust Will to disqualify the beneficiary from having control of the trust in circumstances where they separate from their partner and/or become bankrupt. This is done in an effort to ensure asset protection for the benefit of the beneficiary.

While asset protection cannot be guaranteed, a testamentary trust may help to protect an inheritance from creditors if a beneficiary becomes bankrupt

Tax benefits

Another reason people create testamentary trusts is to take advantage of available income tax benefits by way of ‘income splitting’ or distributing income to other family members, including minor children.

  • Under a testamentary trust all beneficiaries, including minor children, receive the tax-free threshold.
  • Distributions can be made from the trust, not just to the primary beneficiary, but to other potential beneficiaries (including perhaps the primary beneficiaries’ spouse, child or sibling). This may be attractive in order to take advantage of lower income tax bracket thresholds that potential beneficiaries may have.

What you should know

Before you set up a testamentary trust be aware that a testamentary trust Will is a more complex document than a simple will.

  • All trust structures require a trustee or trustees. The trustee/s are given a significant amount of responsibility and must be someone the testator trusts to act in the best interest of the beneficiary. The trustee/s also have the responsibility of attending to ongoing administrative work during the lifespan of the trust.
  • As with any trust, a testamentary trust generates ongoing administrative costs in maintaining a trust. The testator must take into consideration whether the assets of the estate are sufficient to warrant the ongoing costs of creating a trust.
  • It is important that people considering a testamentary trust structure seek legal and financial advice in determining if this is the right estate planning structure for their circumstances.

Experienced Wills & Estate lawyers in the ACT

Effective estate planning is essential to ensure your wishes are carried out and that your beneficiaries are given the best possible outcome. Snedden Hall & Gallop’s knowledgeable Estates Team can assist you in setting up testamentary trust and providing advice to you and your beneficiaries. We have vast experience in all aspects of estates from planning to probate and litigation. Please see our websitefor further information about Wills and Estates. Please contact the Wills & Estate team at Snedden Hall & Gallop on (02) 6285 8000 or by email.