What are Testamentary Trust Wills?
A testamentary trust will allows you to pass on assets to your beneficiaries by creating a trust, or multiple trusts, in your will. In this type of will, you nominate a trustee to administer the trust for the benefit of the beneficiaries.
There can be significant tax benefits in setting up a testamentary trust particularly for minor or vulnerable beneficiaries. A testamentary trust can also provide asset protection and be effective in protecting beneficiaries from creditors and protecting reckless spenders or intellectually impaired individuals.
The trustee will be responsible for the general management of the trust and distribution of the assets within the trust. As this type of trust is fully discretionary, the trustee will have absolute discretion as to when, how much, and to whom the funds are distributed. It is therefore very important to choose the correct person to act as trustee.
It is possible to create more than one trust within the same will and to appoint different trustees for each trust.
Under “simple” wills when the deceased’s estate would be distributed to the beneficiaries. As the distributed assets become the personal property of the beneficiaries they are unprotected against any business and/or relationship risks.
One of the main advantages of testamentary trusts is that they offer significant asset protection. The estate’s assets are distributed to the trustee of the testamentary trust and become assets of the testamentary trust and not of the beneficiaries of the testamentary trust. The trustee will be the legal owner of all assets of the testamentary trust.
Creditors pursuing a person who is a beneficiary of a testamentary trust generally will not be able to access the assets as these assets are not owned personally by the beneficiary. A beneficiary of the testamentary trust generally only has a right to ensure that the testamentary trust is properly administered which is not a right that can vest in the trustee of bankruptcy. In certain situations, testamentary trusts may also offer protection from family law claims (e.g.,where a beneficiary is getting divorced).
The other main advantage is that testamentary trusts offer tax planning opportunities in relation to minor beneficiaries and tax flexibility. Beneficiaries under the age of 18 years are taxed at normal adult tax rates and not at penalty tax rates that otherwise apply to them. They receive the benefit of the progressive adult taxation rates, including the adult tax-free threshold.
A testamentary trust generally provides for discretion as to the amount and timing of income distributions from the testamentary trust. By including a range of beneficiaries, the trustee of the testamentary trust would be able to distribute income earned by the trust in a tax effective manner. For example, the trustee may distribute income to adult beneficiaries whose marginal tax rate is low.
More Information
If you wish to obtain further information, advice or assistance in updating your will, please contact one of our will lawyers in our Estate Planning team at Matthews Folbigg on 9635 7966, email us at estates@matthewsfolbigg.com.au or through the website www.matthewsfolbigg.com.au
DISCLAIMER: This article is provided to readers for their general information and on a complimentary basis. It contains a brief summary only and should not be relied upon or used as a definitive or complete statement of the relevant law. Liability limited by a scheme approved under Professional Standards Legislation.
