A Testamentary Trust Will allows a willmaker to leave assets to a trust rather than leaving them to a beneficiary directly. A testamentary trust will can contain any number of trusts and can be drafted to suit your needs and goals.
While a testamentary trust will is complex in a documentary sense, the will is simple to administer both for probate purposes and long-term investment goals.
Benefits of a Testamentary Trust Will
Trusts are used in estate planning for a number of reasons including:
- Providing asset security to beneficiaries who are exposed to creditors or business risks;
- Providing a tax-free or tax-effective income to a surviving spouse, children or grandchildren;
- Preventing irresponsible family members gaining ownership of (or disposing of) assets. The trust can instead provide them with a regular income; and
- An appropriately-drafted testamentary trust can provide some protection from family law claims.
Trusts provide asset security to beneficiaries because the trust is considered to be a separate legal entity to the beneficiary. Except in rare circumstances, creditors of the beneficiary (including a trustee in bankruptcy) will not be able to get at the assets contained in the trust.
Trusts provide tax-effective income by allowing beneficiaries to stream income to family members who are on lower tax rates than them such as spouses or children. One of the key advantages of testamentary trust wills is that minor children can draw income from them at normal tax rates (with a normal tax-free threshold) rather than penalty tax rates.
For example:
John is an apparently fit and healthy engineer when he suffers a fatal heart attack playing his usual Saturday afternoon game of tennis. His wife Joan is employed full-time on $90,000 pa. She is left with three children aged 8, 10 and 11.
If John’s will leaves his estate ($700,000.00) to Joan and Joan invests that money at 5% interest, she will earn income of $35,000 per year but will lose $11,600 of it in tax.
If, instead, John’s will left his estate to a testamentary trust, Joan would be able to stream some or all of the income to their children for school fees, accommodation etc. Because each of the children is entitled to an $18,200 tax-free threshold, they would pay little or no tax on that income.
Control of Testamentary Trusts
Trusts created by a will can be controlled in any way you choose. Where trusts are created for asset protection or tax purposes, it is common for the intended beneficiary to have control of the trust.
Where trusts are intended to protect beneficiaries against themselves (eg. beneficiaries with addition problems or disabilities that make managing money difficult) or against family law claims it is more common to leave control of the trusts to other people such as siblings, trusted advisors or friends.
One important thing to consider is whether the trust should be mandatory. Often, it is best to give your beneficiaries the option of having a trust. That way, they will not be stuck in a trust structure if it is of no benefit to them.
Types of Testamentary Trusts
Your will needs to reflect your wishes, and testamentary trust wills are no different. Every testamentary trust will needs to be tailored to the purposes it is intended to achieve. To that end, here are some common types of testamentary trusts:
- Capital Protected Trust. In this type of testamentary trust, the income from the trust can be distributed to beneficiaries but the assets (“capital”) remain untouched. This will is usually used to ensure that wealth lasts beyond the life of the initial beneficiary so that the willmaker’s children, grandchildren and great grandchildren can benefit. A capital protected trust may provide for defined amounts of capital to be made available to the primary beneficiary during their life.
- Fixed and Flexible Trust. This type of trust limits access to the assets of the trust by a beneficiary for that person’s lifetime. It can be useful in circumstances where beneficiaries are addicted to drugs, alcohol or gambling.
- Staggered Release Trust. This type of trust staggers the release of income or capital from the trust to each of the beneficiaries. It is commonly used to give children access to trust funds in instalments as they age.
- Special Disability Trust. A special disability trust will creates a trust for the care and accommodation of a disabled beneficiary (usually the willmaker’s child). The income generated from this type of trust may be free from Centrelink means testing to protect the child’s disability pension and benefits, although some criteria do apply. The willmaker can provide for the distribution of the remaining balance of the trust on the death of the disabled person.
