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Testamentary Trusts

A Testamentary Trust is a Trust established under a Will that does not come into effect until after the death of the person making the Will. A Trust is not a legal entity. A Trust is a relationship between a number of persons whereby assets are managed by one person (or persons) i.e. a Trustee, for the benefit of others "the Beneficiary or Beneficiaries". The Trustee can either be an individual or a Trustee company. The individual who holds most of the power or control over the Trust assets is called the appointer of the Trust who has the power to "hire and fire" the Trustee.

There are many forms of Testamentary Trusts, but broadly the Trustee has the discretion to distribute capital and income between a group of beneficiaries nominated in the Will. Usually we will try to include a wide number of potential beneficiaries to give greater flexibility to the Trustee in distributing the capital and income between those beneficiaries. In some circumstances it is not appropriate that "at risk" beneficiaries be eligible for the distribution of capital. Those beneficiaries may include persons with drug, alcohol or gambling dependencies, those going through family law breakdowns or be bankrupt. Special provisions may then be included in the Testamentary Trust to protect those beneficiaries.

There is no standard format for a Testamentary Trust and each Testamentary Trust is adapted to suit the needs of a particular person or family.

Benefits of a Testamentary Trust

There are many benefits of a Testamentary Trust however they may be broadly summarised as follows:

1. Protection of assets
The assets are held by the Trustee on behalf of the beneficiaries and therefore can not be taken out of the Trust without the Trustee agreeing to distribute them, at the Trustee's discretion, to the beneficiaries. The beneficiaries do not legally own the assets. As noted above the Trust structure MAY protect the assets of the Trust in some of the following circumstances:
 
• A beneficiary suffering a marriage or relationship breakdown
Generally speaking Trust assets do not form part of the pool of assets available for division between parties in family law proceedings as the beneficiaries of the Trust have no legal ownership of the assets. This traditionally held view is however under constant challenge by the Family Court and it is therefore important that special consideration be given to the Trust structure in the Will to maximise against the potential for the Trust assets to be call into the pool of assets available for division in family law proceedings;

• Creditor protection
If an intended beneficiary has a number of creditors and/or is likely to be at risk of being made bankrupt (or alternatively is engaged in a high risk occupation) a certain degree of protection may be provided by the use of a Testamentary Trust. As with family law proceeding, the nature of Trust assets is also being challenged by the Courts and again careful consideration should be given to who occupies the controlling positions in relation to the Trust at the time the Will is drafted.

• Estate challenges
When assets are held in the Trust the beneficiaries do not have any absolute entitlement to those assets. Where a Willmaker establishes a Testamentary Trust and provides the Trustee with an absolute discretion as to the distribution of the assets but otherwise provides a direction to the Trustee to as far as possible make those distributions equally between a certain class of beneficiaries, the potential for challenges to the Will will be minimised. This is because it would be difficult for a beneficiary to prove that the Willmaker did not properly consider the individual beneficiaries at the time of making the Will.

• Flexibility in the administration of the Estate
As a Trustee may distribute capital and income to any nominated beneficiaries at any time and in any proportion, the Testamentary Trust gives the beneficiaries flexibility and control over when and how they may take funds. This has both asset protection and taxation advantages for the beneficiaries.

• Protection of beneficiaries
1.5.1 Vulnerable beneficiaries (a)
Social Security entitlements - In situation where an intended beneficiary receives a social security entitlement, they may be at risk of losing their entitlement's if they were to receive a lump sum inheritance. A Testamentary Trust enables those beneficiaries to have monies distributed to them, or their dependents, to meet there needs from time to time. Beneficiaries in receipt of a disability support pension require special considerations and in those circumstances it may be appropriate to establish a special disability Trust under the Will.
1.5.2 Vulnerable beneficiaries (b)
As noted above if one of the intended beneficiaries is a spendthrift, has gambling, drug or alcohol addictions provision may be made through a special Trust set up in the Will to ensure that his or her share of the Estate is protected.

• A Testamentary Trust is useful for blended families and for Willmakers who may wish to provide for their spouse but are concerned about a breakdown in the subsequent marriage of the spouse, or that the spouse may in fact distribute the family assets to the new family.

2. Testamentary Trusts are a particularly useful tool to ensure that taxable income generated by the Trust is allocated to beneficiaries in a tax effective way. Typically income may be allocated to minors under the age of eighteen (18) years (e.g. grandchildren) in a very tax effective manner which ultimately assists the Willmakers children.

Who is an appropriate Trustee of a Testamentary Trust

The Willmaker may appoint any person to become the Trustee of the Testamentary Trust. The Trustee may include the spouse or partner or children or alternatively a professional advisor or a professional Trustee company. The Trustee company of a Family Trust may also be used (in appropriate circumstances) to act as the Trustee of the Testamentary Trust. The Trustee whom the Willmaker has the upmost confidence will act in the best interest of the intended beneficiaries.

Ending the Trust

The terms of the Trust provide that the Trust will end (vest) eighty (80) years form the date it commences or a date nominated by the Trustee. It should be noted however that prior to the Trust coming into operation the executors of the Will generally have a discretionary power not to use the Testamentary Trust if the primary beneficiary named in the Trust consents.

Disadvantages of a Testamentary Trust

Due to the complexity of considerations in preparing a Testamentary Trust the costs of establishing the Trust is generally higher than the cost of preparing a simple Will. There are also ongoing administrative costs in maintaining the Trust, including accounting fees for preparation of Trust tax returns. A Willmaker must therefore consider whether the income to be generated by his or her Estate will be sufficient to warrant the set up and ongoing costs.

Please note:
The information provided is accurate based on the state of law existing at the time it was written. Willmakers are urged to review their Wills regularly (at least every 3-5 years) to ensure that the provisions of their Wills achieve the Willmaker's Estate planning objectives from time to time.



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