What is a Testamentary Trust?

Estates

A Testamentary Trust is a trust which is established as part of a Will maker’s Will. The terms of the Testamentary Trust are included in the Will, making the Will a long and complex document.

What types of Testamentary Trusts are available?

There are 2 main types of testamentary trusts. They are:

Discretionary testamentary trusts. 

In this type of Will, the Will maker creates discretionary Testamentary Trusts for their beneficiaries. In the Will, the Will maker offers their beneficiaries a choice about how they would like to receive their share of the estate. That is, as an outright gift or alternatively via a Testamentary Trust.

Protective testamentary trusts. 

In this type of Will, the Will maker gives the beneficiary their share of the estate via a protective trust. The Will maker appoints a Trustee who is not the beneficiary to manage the beneficiary’s share of the estate through a trust.

This allows the beneficiary to benefit from the estate but does not allow them to control or own their share of the estate. This type of Will can be useful where a beneficiary is vulnerable or disabled and where they do not qualify for a Special Disability Trust.

What are the advantages of a Testamentary Trust?

There are many advantages in offering your beneficiaries the ability to use Testamentary Trusts in your Will. These include:

Pension benefits

The assets of a Testamentary Trust are not currently taken into account when determining a beneficiary’s entitlement to a pension. That said, any income generated by the trust will be taken into account for the purposes of the income test.

Tax advantages

By distributing or sharing the income of the Testamentary Trust between beneficiaries, the Trustee is able to manage the total income tax payable by the group. Under a Testamentary Trust, minors are treated as adults and that means that they can obtain the benefit of the tax free threshold, low income rebates and varying tax brackets.

Protection from bankruptcy

If a beneficiary has financial difficulties such as bankruptcy, the assets held by the Trust can in some circumstances be protected from the beneficiary’s creditors.

Protection where there is a breakdown of relationship

If a beneficiary is involved in a separation, divorce and/or matrimonial property proceedings, then a Testamentary Trust might assist to keep the beneficiary’s share of the estate separate from their own assets and ultimately, separated from the claims of their ex-spouse.

Incapable or vulnerable beneficiaries

If a beneficiary is vulnerable (perhaps suffering from drug abuse) or is disabled then a Protective type of Testamentary Trust may be very useful for them in protecting their share of the estate from being squandered or exploited, for example.

With this option, the trustee of the Testamentary Trust has control of the beneficiary’s share of the estate and there is the option for the trustee to preserve the capital forming the Testamentary Trust.

Who can set up a Testamentary Trust?

Anyone over the age of eighteen (18) years of age who has the capacity to make a Will can establish Testamentary Trusts for their beneficiaries in their Will. You should seek legal advice to determine whether the creation of Testamentary Trusts in your Will will be a benefit to you.

Who can be the Trustee of a Testamentary Trust?

Any person who is over eighteen (18) years of age can be appointed as a trustee of a Testamentary Trust. The Will maker can also choose to have more than one trustee of a Testamentary Trust.

Often the trustee of the Testamentary Trust will also be the beneficiary of the trust. Although, you should seek legal advice about who best to appoint as the trustee of the Testamentary Trust because a variety of factors need to be considered when deciding who to appoint as trustee.

What assets can be put into a Testamentary Trust?

Almost any asset forming part of the beneficiary’s share of the estate can be put into a Testamentary Trust including:

  • Shares;
  • Real property;
  • Cash; and
  • Valuables. For example, artwork, furniture, or jewellery.

Other assets which do not come from the beneficiary’s share of an estate can be placed into the Testamentary Trust once it is established. However, those assets may not be subject to the generous tax concessions that assets from the deceased’s estate are entitled to.

How long will a Testamentary Trust last for?

In Queensland, a trust can live for up to eighty (80) years. However, usually the terms of the Testamentary Trust will allow other circumstances in which the Testamentary Trust can be ended. For example, if and when the trustee chooses to wind up the trust.

When can the assets in a Testamentary Trust be distributed?

The trustee can decide which beneficiaries to pay from the capital and income of the Testamentary Trust (subject to the wording of the trust).

In addition, if the Testamentary Trust is wound up, then the trustee must distribute the balance of the trust to its beneficiaries.

Using Testamentary Trusts can provide flexibility, asset protection and tax benefits for your beneficiaries. Call the dedicated team at CRH Law for further information about Testamentary Trusts or click here to read our paper Good Will/Bad Will which discusses Testamentary Trusts in more detail.