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What is a Testamentary Trust?

DO YOU NEED A TESTAMENTARY TRUST?

Have you been told that you should have a testamentary trust but are confused about what this means?

Firstly, a testamentary trust is any trust created in a Will.  It can be as simple as saying “my Executor holds my estate on trust for my minor children until they reach the age of 18 years”. Usually though, a testamentary trust is created in a Will to hold all or part of the estate on trust for primary and potential beneficiaries and can continue for up to 80 years.  The trust does not come into effect until the death of the willmaker.

 

Some of the reasons for setting up a testamentary trust in a Will include asset protection, control and flexibility over how the assets are used and applied amongst beneficiaries, protection of vulnerable beneficiaries (ie those who may have addiction issues or may not manage money well, or beneficiaries who may be at risk of bankruptcy or relationship breakdown).

 

One of the main advantages of having a discretionary testamentary trust is tax effectiveness for the beneficiaries – income from the trust can be distributed between the beneficiaries based on their marginal tax rates.  One important difference between a testamentary trust and a family trust is that the normal tax-free threshold is available to minor beneficiaries.

Most testamentary trusts are discretionary, meaning that the trustee can decide how to distribute the income and capital of the trust.  In some cases, the willmaker requires the trust to be fixed, meaning that the beneficiaries are pre-determined and their entitlements are fixed.

One of the disadvantages of testamentary trusts is that there are costs involved in having and maintaining the trust structure and the size of the estate may not justify these expenses.  If you are not sure whether a testamentary trust will be useful for your beneficiaries, then it can be included in a Will with an option for the primary beneficiary to make a choice as to whether or not to use the trust at the relevant time.

If you want to know whether you should include a testamentary trust in your Will, you should speak to an experienced Wills and Estates lawyer.  They will be able to advise you based on your financial position, your family situation and what you want to achieve for your beneficiaries.

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