Testamentary Trusts – Prepared by Wightons Lawyers
Testamentary Trusts are Trusts that are created within your will. Testamentary Trusts are designed to provide your beneficiaries with asset protection and can reduce tax that is payable on the income earned by inherited funds or assets.
You can establish a discretionary Testamentary Trust whereby the beneficiary has the choice to take all or part of their inheritance through the Testamentary Trust. The main beneficiary generally has the power to manage the Trust and to decide who from a class of potential beneficiaries will receive distributions from the Trust.
A protective Testamentary Trust can be established for beneficiaries in need of protection, for example those with disabilities or vulnerable beneficiaries. The Trustee (person in control) of this form of Trust would be someone other than the intended beneficiary.
Assets inherited that form part of a Testamentary Trust are not owned by a beneficiary personally, but are assets owned by the Trust, and therefore are not available to creditors. This can assist people at risk of being sued to retain the inherited assets, rather than lose the assets to creditors.
If the beneficiary is a spendthrift, gambler, vulnerable or has a mental illness, with the result they are not financially responsible, the Testamentary Trust could ensure that they are not deprived of the benefit of their inheritance but they do not have control of how their inheritance is used.
There is some limited asset protection for those beneficiaries with relationship breakdowns.
Tax effective distributions can be made by the Trustee of the Trust. Instead of a beneficiary holding assets in their own name, and therefore paying tax at their marginal tax rate, the Testamentary Trust can allow more tax effective distributions to be made to eligible beneficiaries whose own marginal tax rate is lower, or in the case of minors, have access to the full tax free threshold.
Operation of the Trust
The Trust can remain in existence for up to 80 years. The terms of the Trust are as set out in the Will.
The Will appoints a Trustee/s who is responsible for the management of the Trust and who decides receives distributions from the Trust. This person is usually the person for whom the Trust is established (called the Primary Beneficiary). The Will nominates a class of persons (eg children, grandchildren, siblings, spouses etc) who are able to receive distributions from the Trust if the Trustee so decides.
What happens to the Trust if the Primary Beneficiary dies?
The Trust can be wound up, and the assets distributed to such of the beneficiaries as the Trustee considers appropriate or it can continue until the Trustee decides to wind it up (but not more than 80 years from your death).
A Will containing a Testamentary Trust costs more to make as it is a more complex document (it contains the terms of the Trust). Once the Trust is established (after death), the Trust needs to lodge annual taxation returns.