Testamentary Trusts Explained
What is a Testamentary Trust?
A testamentary trust is a special type of trust created through a Will. Unlike trusts set up during a person’s lifetime, a testamentary trust only comes into effect after the Will maker passes away. These trusts are popular estate planning tools, offering structure, control, and flexibility for managing and distributing inherited assets.
Most testamentary trusts are similar to discretionary family trusts established during the lifetime of a person, complete with classes of potential beneficiaries, extensive powers and unfettered discretions given to the trustees as to distributions of income and capital.
How Does a Trust Work?
A trust is in effect simply a legal relationship where:
- A trustee (the legal owner) holds assets on behalf of others
- The trust’s assets (also known as “trust property”) are managed for the benefit of individuals or groups called beneficiaries
- The trust operates according to specific rules outlined in a trust deed or, in the case of a testamentary trust, within the Will itself.
Key Roles in a Testamentary Trust
Trustee
The trustee of the trust is the legal owner and therefore has decision making control over the assets of the trust.
The trustee can be a company or individuals. If the trustee is a company, the directors of the company will have the day-to-day control of the trust.
In some instances, trusts also have a ‘principal’ (also known as an appointor, guardian or nominator) who retains ultimate control over the trust. The principal has the ability to appoint and remove the trustee at any time, and its consent may be required to make any amendments to the trust deed.
Beneficiaries
A testamentary trust can cover a wide range of beneficiaries. Typically, this includes the primary individual the trust is intended to benefit, their children, grandchildren, extended family, or even other related entities. The trustee decides how to distribute income and capital among these beneficiaries. This often comes with tax considerations and unique family circumstances in mind.
Some testamentary trusts specifically limit the range of beneficiaries, commonly to ‘lineal descendants’ (children and grandchildren). The Will maker restricts the discretionary powers of the trustee so they may only distribute income or capital (or both) to the Will maker’s children and grandchildren, excluding any spouse of the children and/or grandchildren.
The Trust Deed (or Will)
Every trust is governed by a set of rules contained in a trust deed. This sets out the trust’s administration, participants, trustees’ powers, and how long the trust Will run (in most states, up to 80 years). Testamentary trusts are established under a Will, with the rules of the trust normally set out in the Will itself.
How is a Testamentary Trust Established?
After a Will maker’s death, the executor of their estate handles administration. When estate debts and obligations are settled, the specified assets are transferred to the trust’s trustee. They then manage those assets for the nominated beneficiaries according to the trust’s terms.
Why Consider a Testamentary Trust?
Testamentary trusts can offer several key advantages:
- Effective tax planning opportunities: You’re able to distribute income amongst a range of beneficiaries. In particular ensure concessional tax treatment of distributions of capital and income to beneficiaries under the age of 18 years.
- Provides ongoing financial support for infant children and disabled beneficiaries
- Protects accumulated wealth: They can shield family wealth from irresponsible spending, relationship breakdowns, and bankruptcy claims.
- Minimises the risk of unintended loss by a beneficiary of their government sourced pension or other benefits
- Allows for multi-generational asset protection and adaptation to changing family needs over time.
If you’re considering including a testamentary trust in your Will, it’s important to get tailored advice for your circumstances.
Our legal team can help you understand the options and benefits for your family. Contact us today!
This is general advice only and has not been prepared with your situation and needs in mind. For individual and personalised advice, we highly recommend that you seek out proper professional advice from your lawyer.
