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What is a Testamentary Trust?

Oct 20

A testamentary trust is defined as a trust that is created in a will to take effect after the testator’s death. It allows a testator to make provisions for a beneficiary without allowing them direct access to the bequest.

There is no maximum number of trusts that a testator an establish in a will. It can be preferable for each beneficiary to have a separate trust, rather than be subject to the terms of a general trust.

Distribution of Assets

Upon the death of the will maker, the assets of the deceased are distributed to the trustee/s of the testamentary trust that holds the assets for and on behalf of the nominated beneficiaries. In this manner, the assets are not transferred to the individual beneficiaries directly, but rather to a trustee of the established testamentary trust that holds the assets in the trust fund, for and on behalf of the beneficiaries.

Testamentary trusts are designed to provide maximum flexibility, whilst both allowing for tax-effective distribution of capital and income derived from the assets, providing a greater degree of asset protection. This is in comparison to a situation wherein the assets were held by the beneficiaries in their personal capacity.

Advantages of a Testamentary Trust

A testamentary trust can be validly established for up to 80 years. Subsequently the trust can benefit two to three generations, with the distribution of the trust’s income and assets being completely flexible.

A testamentary trust can be dissolved at any time with distributions made to the desired beneficiaries. The trustee/s may, at their discretion, distribute all or part of the assets to the nominated beneficiaries.

Asset Protection: Re-Marriage and De-Facto Relationships

If a will is not correctly structured with the incorporation of testamentary trusts, and the decease's assets are distributed directly to his or her spouse, those assets could be at risk if one widowed spouse remarries or enters a de facto relationship.

Assets from the first marriage could be diverted to the benefit of the new spouse and by extension, their family, if something were to happen to your spouse ahead of their new partner. In a testamentary trust, if one spouse dies, and the other remarries, assets held in trust can be protected for the benefit of the nominated beneficiaries.

In this scenario where one spouse dies and the surviving spouse either re-marries or enters a de-facto relationship, the assets held in the testamentary trust may again be insulated and protected for the benefit of the nominated beneficiaries under the testamentary trust, rather than the assets being held directly by the deceased’s ex-spouse’s children born of the first marriage.

Any assets held in a testamentary trust may also be protected against Family Law litigation brought by spouses who look to make a claim for family assets within the context of a marriage breakdown. An inheritance held in testamentary trust is unlikely to be the subject of a Family Court Order, although it may be regarded as a financial recourse and thus impact upon the actual terms of a property settlement.

If a beneficiary receives their share of a deceased’s estate in a trust, and it remains in the trust, it cannot be subject to a will change on the death of the beneficiary as it would not be considered part of their estate.

Disadvantages of Testamentary Trusts

Succession Issues

The trustee essentially controls the trust and has discretion to determine the future of the trust and its assets. The trustee can distribute all or any part of the income to one or more of the beneficiaries at such times and in such amounts as they see fit.

As such, the succession of the role of trustee must be specifically spelt out in the will, if the individual wishes to determine who will control the trust upon their death.

If the trust restricts access to capital or income, a beneficiary may become upset and challenge the terms of the will. The possibility of a challenge may be reduced by the will maker communicating their intentions to their beneficiaries at the time that they prepare their will.

Administration of the trust may require a level of cooperation between family members who may share the role of trustee of the trust. This could lead to potential disharmony.

Administration Costs

Assets held by a testamentary trust must be sufficient to justify the expense of administering the trust. An example of this would be preparing and maintaining accounts and a tax return which requires lodgement annually.

 

If you have any queries about testamentary trusts in wills or any other aspect of estate law, we can be contacted on 07 5443 9988 or [email protected].

Argon Law is a Sunshine Coast law firm based in Maroochydore.  We are commercial lawyers and wills and estate lawyers and are eager to assist you in any way we can.