- What is a Testamentary Trust?
- Who can be a trustee?
- The types of assets held in a Testamentary Trust
- What are the advantages of a Testamentary Trust?
If you are making your Last Will and Testament and thinking of providing a specific asset and/or a designated portion of your estate, or the entire remaining balance of your estate to your loved ones after your death, you may want to consider using a Testamentary Trust.
This type of trust can ensure your assets are distributed the way you intend them to be, and you can create multiple Testamentary Trusts under one Will.
What is a Testamentary Trust?
Testamentary Trusts are created under a Will and therefore come into effect only after the death of the person who made the Will, the testator.
The principal objective of a Testamentary Trust is to hold and manage all or some of the assets and distribute it to the beneficiaries as per the terms outlined in the Will. To manage the assets of the Trust, a trustee must be nominated.
Who can be a trustee?
You can choose anyone to be a trustee, including the executor of the Will or your spouse, another family member, or even a very good friend. However, when choosing a trustee, it is important that you choose someone that you can rely on to carry out your directives and the directives of the trust carefully and accurately. Remember, you are choosing someone to act in the best interests of your beneficiaries, so it is important to take the time to choose someone that you have confidence in.
What is the difference between a Will and a Testamentary Trust?
A Will is a legal declaration by which a “testator” (Will-maker) expresses their wishes for the distribution of their assets upon their death. For example, a Will can distribute property, both real and personal, owned by the deceased. A Will also states who will receive the assets named in the Will. These persons are called beneficiaries. Lastly, a Will names an executor. The executor will be responsible for following the directives contained in the Will for the proper distribution of the assets the estate holds to the named beneficiaries.
Testamentary Trust, on the other hand, is where the assets of the Will are held and managed by the trustee. With a Testamentary Trust the assets are not delivered immediately and in full to the named beneficiary. Instead, the trustee of the Testamentary Trust distributes the available assets over time and in accordance with the specific directives contained in the trust. For example, a Testamentary Trust may indicate that the beneficiary of the Trust is to receive funds to pay for school tuition. As such, when school tuition is due and owing, the trustee will pay the invoice.
Who can be beneficiaries of a Testamentary Trust?
The beneficiaries of a Testamentary Trust can be anyone the Testator chooses. It is possible to both be a beneficiary under the Will and a named beneficiary of a Testamentary Trust. In many instances, a Testamentary Trust is used for children who are under the age of eighteen, or even twenty-one. A Testamentary Trust might also be created to provide funds to care for an elderly or disabled person who cannot take care of their own financial concerns. The beneficiaries of a Testamentary Trust all have two things in common; 1) the funds they need for basic living expenses or education or any other named need will be distributed to them by the trustee and 2) the funds will only go to pay for the needs named in the Trust.
The types of assets held in a Testamentary Trust
- Investments; This can include financial investments held in money market accounts or the stock market or retirement accounts.
- Land or property; This can include a home the deceased owned or property that was owned and used as rental property or even land that has not yet been developed.
- Cash; and
- Other valuable assets; This can include paintings, furniture jewelry, or any other type of personal property that the deceased has indicated should be given to a named beneficiary.
What are the advantages of a Testamentary Trust?
1. Flexibility for the beneficiaries
With a Testamentary Trust, you have the right to identify how you want the funds in the trust to be spent for the betterment of the beneficiaries. You also have the flexibility to distribute the assets to the beneficiaries as you believe they will need them. For example, you can choose to create a trust to pay for a child’s university tuition, room, board and books. As such, only monies going to cover these items will be distributed on behalf of this particular beneficiary.
You can set up this trust to suit your own individual requirements. Using this method, you can direct the trustee distribute to you enough of the funds to cover items such as buying a new car or paying your mortgage. If you want the Testamentary Trust to cover the needs of your children you can indicate that the trustee will distribute funds to pay your children’s athletic costs or for their music lessons or any other need you deem appropriate and necessary.
2. Asset protection
Assets held by a Testamentary Trust are protected to a certain degree because the assets are being held by the Trust. Therefore, the beneficiaries do not have unfettered access to the funds that have been left to them. Instead, the funds can only be distributed to them for the financial needs that are defined by the Trust. If a beneficiary makes a request to the trustee for a cost that is not delineated in the Testamentary Trust language, the trustee will refuse to release funds for the item or purpose being requested. In addition, because the assets are held by the Trust, they are not available to the creditors of a beneficiary or to the spouse of the beneficiaries after the breakdown of a marriage or de facto relationship.
3. Protection from irresponsible beneficiaries
A Testamentary Trust is particularly appropriate for beneficiaries who are not able to handle their own finances in a responsible manner. Sometimes this is due to being underage or having a disability or being elderly. Other times it is simply due to not being a financially responsible person. Regardless of the reason or basis for the creation of the trust, the creation of a Testamentary Trust for these individuals allows the trustee to hold and protect the assets on behalf of its beneficiaries.
4. Income tax benefit
The key benefit of this kind of trust is the income tax redemption. If assets are left to a beneficiary under a Will, the beneficiaries might decide to invest the funds they receive. This would allow them to earn extra income. The extra income would then be considered part of their annual salary and they would pay taxes on this income at the usual marginal rates.
In the case of Testamentary Trusts, the trustee distributes the income of the Trust to its beneficiaries. If the beneficiaries further distribute the funds to their children, who are not working, then they can claim an income tax benefit for every child they have distributed funds.
5. No cost for transferring assets to your trust
When using a Testamentary Trust, there are tax advantages.
You can pay your assets into this trust without paying any Stamp Duty and Capital Gains Tax because the transfer takes place through your Will.
6. Superannuation & life insurance
You can also include the accumulated balance of a superannuation fund and life insurance policy entitlements into your Testamentary Trust. It is better for your beneficiaries to receive the entitlements through the Trust and not through any other mode of payment outside the protection of the Trust.
In cases where the beneficiaries are temporarily incapacitated, the Trust allows the family of the beneficiaries to manage the assets for their betterment (rather than relying on an external agency).
Can a Testamentary Trust be contested in NSW?
Yes, as a Testamentary Trust is established by a Will it can still be challenged or contested. The legal process for contesting a testamentary trust typically falls under family provision claims, which are governed by the Succession Act 2006 (NSW). These types of claims allow eligible individuals to challenge the distribution of a deceased person’s estate if they believe they have not been adequately provided for in the Will.
Further information about Wills & estate planning:
Owen Hodge Lawyers Testamentary Trust Services
At Owen Hodge Lawyers, we have a seasoned staff with expertise in the area of Testamentary Trust creation. In addition to being able to help you draft a Will, our solicitors will be able to help you determine if you have family members who might better be served by the creation of a Testamentary Trust, rather than a direct distribution of their share of your assets via your Will.
Our Wills & Estates Team
Frequently Asked Questions:
A Testamentary Trust is one that comes into being through a Will. A regular trust can be drafted and come into being without being part of a Will.
You can choose anyone you have confidence in to be the executor of a Testamentary Trust. It does not have to be the same person who is the executor of your Will. It can be a family member, a spouse, a friend or an impartial person you trust.
Money from a Testamentary Trust is distributed in accordance with the directives contained within the language of the trust.
Yes, this is an option. However, it might not be the wisest option as there is no other named individual to watch over the distribution of the funds.
You name a beneficiary of a Testamentary Trust by including them in the list of those persons who are allowed to receive a disbursement from the trust.