If I had a dollar for every time a client comes in to discuss their estate plan and says “I was at a barbeque on the weekend and a mate said I should have something called a testamentary trust …”, I could probably pay for my 4th child’s private school fees (or at least cover the cost of my weekly coffee intake). My response almost always is, “Well, your mate is one smart cookie.”
What is a testamentary trust?
A trust is a legal relationship where there is a legal owner of property (the ‘trustee’) who holds certain assets (the ‘trust property’) for the benefit of others (the ‘beneficiaries’), pursuant to certain rules (the ‘trust deed’).
A testamentary trust is simply a trust established pursuant to a will to hold an inheritance for certain nominated beneficiaries, and a broad range of potential beneficiaries (such as lineal descendants, a wider class of relatives, and associated entities). Most testamentary trusts are similar to ‘normal’ discretionary trusts established during a person’s lifetime, with extensive powers and unfettered discretions given to the trustees to invest and manage the trust fund and distribute income and capital. The will itself sets out the terms of the trust and becomes the trust deed.
What are the benefits of a testamentary trust?
Appropriately structured testamentary trusts can achieve numerous objectives, such as:
- Significant tax planning opportunities by being able to distribute income and capital amongst a range of possible beneficiaries, and in particular access concessional tax treatment of distributions of income to beneficiaries under the age of 18.
- Safeguarding inherited assets from creditors and trustees in bankruptcy. This can be a particularly important advantage where potential beneficiaries are company directors, business owners or professionals.
- Increased protection of an inheritance from attack by the Family Court in the event of a beneficiary’s relationship breakdown.
- Protecting accumulated wealth from spendthrift beneficiaries - sometimes you need to protect an ‘at risk’ beneficiary from themselves;
- Providing for infant children and vulnerable or disabled beneficiaries;
- Creating a legacy for future generations. The trust could potentially operate for up to 80 years from death.
There is no ‘one size fits all’ when it comes to testamentary trusts, and the appropriate strategy and structure of the testamentary trust should be tailored to achieve your particular objectives.
If this article has raised questions for you, the team at Partners Legal can help.
*A Matter of Trust was the second hit single on Billy Joel’s 1986 album The Bridge