One of the most loving things that you can do for your family is 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 might 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?
Drafting a testamentary trust requires specialised knowledge or estate planning and trust laws. It is essential to have a qualified professional, typically a solicitor with experience in estate planning who understands the intricacies of the law, draft your testamentary trust and tailor the trust to your specific needs and goals as well as ensuring that all legal requirements are met. 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 upon to carry out your wishes (the trustee or trustees).
A common arrangement for parents of young children is to incorporate all assets (including property and superannuation) into a trust for the benefit of their children. In that scenario the trustees might 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 the most important thing is to ensure that the trustee is reliable and honest. Having more than one trustee can be good insurance against fraud or carelessness.
In some cases, the size or contents of an estate may justify an expert trustee. A trustee can be a professional (such as an accountant or lawyer) or an organisation (such as the NSW Trustee and Guardian). However, a professional trustee does need to be paid out of 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 lets you look after your children, grandchildren, and even great-grandchildren! There are many advantages to this type of arrangement.
Asset Protection
A testamentary trust offers asset protection for the beneficiaries, particularly in circumstances where they may be vulnerable to creditors, lawsuits or other financial risks, such as marriage breakdown minor children or beneficiaries with special needs and disabilities.
One of the key advantages of a testamentary trust is its ability to be specific and prescriptive. You can set out exactly how your money should be divided between the beneficiaries, when the money is given out, and even what it can be spent on. This can prevent the capital from being frittered away by beneficiaries with mental health conditions or addictions.
The legal ownership of the trust assets lies with the trustee, not the beneficiaries. As a result, the assets are generally protected from outside claims against the beneficiaries. This protection is particularly valuable during family law disputes as the trust capital is unlikely to be subject to division in a divorce. Additionally, the capital is generally safeguarded from claims arising from bankruptcy, personal injury or professional negligence.
Flexibility
You can choose to make your testamentary trust discretionary. In that case, the trustee has some freedom in distributing the income and capital of the trust. For instance, your trustee may distribute the trust based on the unique needs of each child through the years. This allows the trust to evolve over time as circumstances change.
Minimise Tax and Capital Gains
There are tax benefits from testamentary trusts, which you should discuss with your solicitor and accountant. In short, trustees may be able to distribute from a discretionary trust in tax-effective ways. In addition, under a testamentary trust, minor children receive beneficiary tax rates for income from the trust.
Are there any disadvantages to a testamentary trust?
As with all forms of estate planning, a testamentary trust is not right for everyone.
The administration of a trust costs money each year the trust is operational This will include annual tax and auditing costs and could also include the trustee’s professional fees. For this reason, a discretionary trust is not usually the best choice for smaller estates.
A testamentary trust can be challenged by those who wish to receive immediate access to their inheritance. Regardless of whether the claim is successful, the process will cost the estate additional legal fees and may cause family conflict. A testamentary trust always involves a degree of ongoing interaction between the trustee/s and the beneficiary/ies. As with any family dynamic, this can be a source of tension and conflict.
Finally, income from a trust is included when calculating income for Centrelink income support benefits (although currently the assets of a trust are not used to decide eligibility under the asset test).
Conclusion
There are many benefits to using a testamentary trust to protect your loved ones. This form of estate planning allows you to protect your estate against outside claims and ensure that your wealth is used to benefit those you love. There are some disadvantages to choosing a testamentary trust, so it is important to speak to your solicitor and accountant before deciding whether this option is right for you.
This information is for general purposes 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 call us on 61 2 9212 1099 or email info@dls-lawyers.com.
