If you are considering revisiting your Will or in the process of preparing your first one, an effective estate planning tool is including testamentary trusts for your beneficiaries.

What are testamentary trust Wills?

A testamentary trust is a discretionary trust created by a Will.

Upon death, the deceased’s assets are distributed to the trustee of the testamentary trust, who holds the assets for and on behalf of the nominated beneficiaries.

Depending on your circumstances, you may choose to set up a beneficiary controlled testamentary trust, whereby your beneficiaries (e.g. your spouse and/or children) are in control of their own trust.

Unlike under a standard Will, the assets are not transferred to the individual beneficiaries directly forming part of their personal assets – but rather to them, as a trustee of the trust (to hold on trust on behalf of themselves and their family).

How is a testamentary trust established?

The terms of the testamentary trust will be included in your Will and will only come into existence once you pass away, and your estate is distributed to the beneficiaries.

Prior to receiving a distribution from your estate, the executor or beneficiary must take steps to register a tax file number for the testamentary trust and establish a bank account for the trust.

What are the advantages of a testamentary trust Will?

Below are 5 common benefits and uses of testamentary trust Wills:

1. Protection of assets

A testamentary trust will assist your beneficiaries to protect their inheritance, especially in circumstances where that beneficiary is conducting a high-risk business.

If your beneficiaries’ practice in a high-risk profession or operate in a business of their own, their personal assets may be exposed if any litigation is commenced against them personally.

If their inheritance is distributed to and held by the trustee of a testamentary trust, those trust assets may be insulated from a third-party’s claim against the beneficiary (rather than forming part of their personal assets under a standard Will).

2. Flexibility for complex families and protection in matrimonial proceedings

Estate planning can be complicated when accounting for former and current spouses, de facto partners, blended families or children of former spouses. Family situations can be complex, and a testamentary trust can provide a greater deal of flexibility.

Assets held in a testamentary trust may be protected against litigation brought by spouses who look to make a claim for the family pool of assets within the context of a marriage breakdown.

However, in a matrimonial dispute, the Family Court has broad powers when it comes to determining property of the marital pool. 

Whilst the Family Court does have the power to include a trust in the marital pool, if the trust is set up and used correctly, a beneficiary with a testamentary trust can protect their inheritance.

3. Tax benefits

A testamentary trust can be used for tax-effective distribution of capital and income derived from the assets received under a Will.

A testamentary trust can make significant tax savings in the first three years. A testamentary trust is taxed on individual rates for the first three years.  This allows the trust to earn income of up to $18,200 each financial year, tax-free.  Additional income will be taxed at the same rates as an individual.

Depending on the nominated beneficiary’s circumstances, a testamentary trust may also assist them with reducing tax liability, by taking advantage of tax off-setting – distributing income to a range of potential beneficiaries.

For example, under an ordinary family trust, if a beneficiary takes their inheritance in their personal name, they are required to pay tax on the income generated from the inheritance at the top marginal tax rate. However, under a testamentary trust, children under eighteen are taxed as ordinary taxpayers, commencing at the lower tax rates.

4. Protecting vulnerable beneficiaries

A testamentary trust also offers greater control over the distribution of assets to beneficiaries or vulnerable persons.

These beneficiaries may include people with intellectual disabilities, illnesses, addiction problems, gambling etc., which could result in them mismanaging their inheritance.

Testamentary trusts allow for assets to be managed by other family members as trustees (rather than the individual beneficiaries themselves). The trustee then has the complete discretion to distribute all or part of the assets to the nominated beneficiaries.

This protection allows vulnerable beneficiaries to avoid losing an inheritance due to unfavourable financial circumstances (e.g. bankruptcy).

5. Superannuation proceeds

A Will-maker may elect to direct the trustee of the superannuation fund to pay the proceeds of the deceased’s superannuation or death proceeds to the deceased’s Legal Personal Representative (i.e. the executor of the deceased’s estate).

In this instance, the proceeds will be paid to the executor and distributed in accordance with the Will.

If the Will includes testamentary trusts, then the proceeds may be directed to the trustee of a testamentary trust established in the Will (rather than being distributed directly to the nominated beneficiary, forming part of their personal assets).

How do I create a testamentary trust Will?

Testamentary trusts are created in the Will drafting process.

It is important that your testamentary trust Will is drafted correctly in order to take advantage of the benefits highlighted above, and to give effect to your wishes to ensure that your estate is distributed as intended.

It is important to consult an estate planning solicitor about creating a testamentary trust Will.

Matters such as risk in business dealings, taxation, asset protection and the possibility of re-partnering will all come into consideration.

Please feel free to contact us to see whether a testamentary trust Will is right for you.