What is a testamentary trust?

A testamentary trust is a discretionary trust created by a clause in your will. That clause will direct your estate assets (all or some) into a trust rather than being directly distributed to beneficiaries. Apart from some minor differences, a testamentary trust is run just like a family trust, with the trustee having control of assets to be distributed to beneficiaries and with all the benefits of tax planning and asset protection.

Why do I need a testamentary trust?

The simple answer is that you may not need one, as most people can simply elect to distribute their estate to beneficiaries without a trust without any issues. However, if you have any of the following circumstances, it may be worth considering establishing a testamentary trust:

Protecting vulnerable beneficiaries: You have a beneficiary that has an intellectual disability, degenerative disease, drug or gambling addiction. A testamentary trust can protect your capital assets while providing income to the beneficiary.

Blended family: You are part of a blended family and are concerned about how distribution may be diluted or lost for your children or grandchildren. A testamentary trust may guard against issues relating to divorce or remarriage by ensuring funds are passed on to your elected beneficiaries including natural children or grandchildren.

Solvency of beneficiaries:  You are concerned that some of your beneficiaries may have creditors that will benefit from the inheritance. A testamentary trust can provide asset protection to protect the estate where a beneficiary may be bankrupt or facing litigation.

Legacy: You want to ensure you leave a legacy for future generations, such as funding your grandchildren’s education or deposit on their first home. A testamentary trust can include specific provisions for how funds are to be distributed to ensure that you are leaving funds for future generations.

Tax consideration: Your beneficiaries have a high marginal tax rate and those beneficiaries have children. As a trustee has discretion as to distribution of income from the testamentary trust, the trustee can minimise tax by directing funds to children or other beneficiaries with lower marginal tax rates. Your estate will benefit from the flexibility to plan and minimise tax.

How does the testamentary trust work?

Your will sets out the rules for the trust, including who will be the trustee, what investment decisions can be made and who can receive a benefit, including specified events for distribution. A beneficiary will not obtain an interest in the trust assets until the trustee elects to provide that benefit, which provides asset protection benefits and tax planning benefits. We often work with your financial planner and accountant to make sure that the testamentary trust forms part of a comprehensive estate plan.

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