Advantages of creating a testamentary trust

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Most people are relatively well aware of the need and the benefit of having a Will. But, what many people do not realize is that there are a number of additional protections and financial benefits to creating a testamentary trust within their Will.

First, let’s define what a testamentary trust is;

A testamentary trust is a document that is created within a Will that allows for greater control over the distribution of assets to various beneficiaries. The trust also provides for various tax protections and liability shields for the beneficiaries.

The form of a testamentary trust usually takes one of two structures;

  1. Discretionary Trust – This form of trust allows the beneficiary of the trust to make decisions including how much of the monies will be distributed via the trust, whether to use a trustee or to distribute the assets themselves.
  2. Protective Trust – This form of trust appoints a trustee to manage the assets of the trust, determine the distribution of the trust and does not allow for the beneficiary to remove the trustee. This type of trust is best for those beneficiaries who may not be fully capable of managing their assets on their own.

It is important to consider which type of trust would best suit your situation and the circumstances of the beneficiary. If you have any concerns about the beneficiary’s ability to financially manage the assets that you will be leaving to them, then it might be best to use a Protective Trust. If you are uncertain as to the best format for the transfer of your assets via a testamentary trust, then it is highly recommended you speak with a solicitor before making your decision. Once you have given your solicitor some information about the value of the assets and the circumstances of your designated beneficiaries, your solicitor will be better able to make a sound recommendation to which trust you should pursue.

Advantages of a Trust

There are several advantages to using a testamentary trust via your Will. Some of these include;

  • Tax benefits; In general, a trust only pays income tax on the monies that are not distributed. Therefore, distribution of the assets prevents the trust from paying income tax. However, it is important to keep in mind that the beneficiaries will pay income tax on the assets they receive from the trust.
  • Retirement/Pension Funds: Monies received via a trust are not taken into consideration when evaluating retirement or pension funds eligibility. Therefore, it is likely that a person who is on a pension will not lose any part of their pension in an offset against their inheritance. Again, it is important to remember that while the monies may not cause a reduction in pension benefits, the monies will be taxable income.
  • Capital Gains Tax: If assets that would have been subject to CGT are transferred after death via a testamentary trust, the capital gains tax is not assessed against the asset at the time of the death. However, there are nuances of this benefit that must be explained and reviewed with a solicitor before a complete understanding of the implications can be understood. 

Protections of a Trust

There are several protections that are afforded through the use of a Trust for both the Testator and the beneficiaries. Some of these protections include;

  • Preventing financial waste on the part of the beneficiary
  • Protecting the funds from beneficiaries who lack the skills or sense of responsibility to use the money wisely
  • Allowing for beneficiaries basic living needs to be financially secured via the monitoring of a trustee
  • Sheltering persons who are in employment or business situations that create a high level of risk of being subject to litigation.
  • Providing objective overview and control of the assets by a third party trustee
  • Securing monies that cannot be reached via distribution of assets during divorce

There are a variety of benefits and protections that can be afforded a Testator through the use of a testamentary trust. But, in order for a Testator to reap the maximum benefits and protections, the Testator must be willing to share with their solicitor the details of the types of protections that might be needed to protect the assets being transferred and to shield the beneficiaries from any losses via waste or legal action.

If you find yourself in need of assistance with this or any other legal issue, please contact the law offices of Owen Hodge Lawyers. At Owen Hodge, we are always happy to assist clients in understanding the full ramifications of any and all of your legal needs. Please feel free to call us at your earliest convenience to schedule a consultation at 1800 770 780.

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