Despite being less well known than Wills, Testamentary Trusts (also called Testamentary Trust Wills and Testamentary Discretionary Trusts) are becoming more and more popular as an estate planning tool and a smart way to manage family inheritance.
A Testamentary Trust is similar to a Discretionary Trust or Family Trust but it’s created via a Will, and only comes into operation when the Will maker has died. And while Testamentary Trusts are similar to both Wills and Trusts, they offer their own unique way of protecting and passing on wealth within a family.
Testamentary Trusts share the common feature of all Trusts – a separation between the Trustee (as the legal controller of the Trust) and the Beneficiary (as the party who receives the assets of the Trust).
Apart from the protection they provide against Beneficiaries misusing their inheritance assets or third parties making a claim on an estate, a Testamentary Trust offers a simple way to legally minimise tax on inherited assets.
If you’re serious about estate planning and your family situation falls into one of the categories discussed here, Testamentary Trusts are well worth coming to grips with as a uniquely effective way to protect family wealth and lower your tax obligations.
Beneficiaries of a Testamentary Trust often include surviving spouses, parents, children, grandchildren, siblings, other relatives and any trusts or companies the Will maker is involved in.
Although the Trustee has legal control and discretion over how assets are distributed, they are always bound to act in the interests of the Beneficiaries.
Testamentary Trusts should definitely be considered as a protection and risk management tool for estates involving a high value inheritance but they are also useful in a wide variety of other circumstances.
By removing the legal entitlement to money and assets from Beneficiaries, and placing them under the control of a Trustee, a Testamentary Trusts offers:
When it comes to taxation, setting up a Testamentary Trust through your Will can have significant advantages.
The main reason for this is the fact that it allows the Trustee to assign income to different Beneficiaries in the trust to take advantage of their different tax rates. In this way it’s possible to minimise the tax paid on the total sum.
Also, children who are Beneficiaries of a Testamentary Trust are not taxed at the penalty rates they are normally subject to on unearned income. Instead, they are taxed at adult rates and when combined with the low income tax offset, their tax free threshold is higher than it would be for a Family Trust.
When deciding whether a Testamentary Trust is right for you, it's worthwhile weighing the benefits and seeking professional advice before making a decision.
The disadvantages of having a Testamentary Trust are that it requires some extra effort up front when preparing a Will, and ongoing administration in the form of applying for a tax file number and lodging a tax return each year.
There are also ongoing costs involved, especially if you decide to appoint an independent professional or company as the Trustee. In this case, income from your Estate will need to be enough to cover the costs while still providing for the Beneficiaries.
There are also tax considerations for the Beneficiaries because income from the Testamentary Trust will be combined with other income they earn in determining their total tax liability.
Also, given the discretionary power of the Trustee, it can be out of your control how assets are distributed unless you specify conditions in your Will. It’s important to choose a Trustee that you are absolutely certain will have your Beneficiaries’ best interests in mind.
Because Testamentary Trusts are Trusts created by a Will, to set one up you need to consult a legal or estate planning advisor at the time of creating your Will and estate plan.
When the Will maker dies, the Will goes through the probate process and once this is complete, the Testamentary Trust is created and funds can begin to be distributed.
The terms and structure of the Testamentary Trust can be included in your Will by including provisions to specify who the Trustee will be, who the Beneficiaries are, how the Trust will work and how long it should last for – for example, until Beneficiaries get to a certain age.
The Testamentary Trust is a way to enhance the benefits of a Will and is well worth considering as a potentially beneficial way to approach your overall estate plan.
Safewill offers an easy and affordable way to get started with estate planning.