What is a testamentary trust?
Simply put, testamentary trusts are trusts established through a Will. These Wills create a structure that can be incorporated into your Will to give your beneficiaries tax and asset protection benefits in addition their inheritance from you.
Your beneficiary will also receive a degree of asset protection because after your death they will not inherit the money or assets directly but rather through the testamentary trust structure.
This is in addition to unique tax benefits discussed below.
What are the unique tax benefits of testamentary trusts?
The testamentary trusts established by your Will may be used to allocate income to a wide range of family members. This can help to minimise the total tax burden of your family just like a discretionary family trust established during your lifetime.
Where a trust that is created by a Will distributes income to a minor then that minor is treated like an adult for tax purposes – with the full $18,200 tax-free threshold.
This is unique because a minor cannot receive distributions from a trust established during your lifetime without soon paying penalty tax rates.
While all the potential beneficiaries are adults then the trust has all tax benefits that an inter vivos family trust. This can change at any time.
Can testamentary trusts provide asset protection?
Testamentary trusts do provide a degree of asset protection that exceed anything that your beneficiary could establish for themselves.
The degree of asset protection varies with the amount of control your beneficiary has over the trust. A trust with maximum asset protection would give your beneficiary no control and vice-versa.
Are the tax benefits or the asset protection of testamentary trusts more important?
That is up to you.
Some people are interested in tax benefits provided by testamentary trusts.
Other people do not care about their tax benefits and are concerned only with the asset protection that can be provided.
Either way, these structures cannot be taken advantage of without you inserting them in your Will.
Why would I want to limit the control of a beneficiary over a testamentary trust?
You may wish one of your children to have less control over the asset for any number of reasons.
It could be because they are vulnerable to manipulation by friends or family. Perhaps they are a person with a disability or suffer from an addiction. You may just be concerned to provide maximum asset protection to your beneficiaries as a kind of insurance policy.
If you are not concerned about your beneficiary’s exposure to risk, then you can leave them the maximum amount of control possible in these kind of structures, and conversely minimum asset protection, while still giving them maximum tax benefits.
It is up to you how much or how little control your beneficiary has over the assets that are put into the trust.
When does a Testamentary Trust coming into effect?
Testamentary Trusts do not come into effect until after the death of the person who made the Will.
I have a child with a disability. Should I include a testamentary trust in my Will?
If your child would have any trouble managing their finances or making significant decisions then we would ordinarily recommend a testamentary trust tweaked to cause the focus to be on the beneficiary’s wellbeing and limit their control over the trust. We refer to these trusts as an all-needs protective trust.
You should consider who should be the trustee of such a trust. You can include a family member though they may be a person who can benefit from the trust and this could give rise to a potential conflict of interest. Alternatively, you could consider a professional adviser or a trustee company for this role.
You should be aware that any assets held in such a trust would be subject to the Centrelink assets and income test for the purposes of the disability support pension. The same applies to means-tested pensions.
I do not want to adversely affect the beneficiary’s pension. Is there a trust structure to which the Centrelink assets and income test does not apply?
Yes. However, this only applies for people with a ‘serious disability’.
Assets held within special disability trusts (SDT) are not factored into the assets or income test for Centrelink purposes. However, the balance of a SDT is limited by regulation and the use of these funds are very limited.
In an estate planning context, we generally use a combination of an all-needs protective trust and a SDT.
SDTs are a specialised area of practice. You should seek advice if you are considering one.
Who can be trustee of a testamentary trust?
Anyone you wish, including the executors of your will, your spouse or partner, or your children.
The trustee has effective control of the trust, so the trustee should be a person who you know, and whom you trust to act in the best interests of those who are to receive the main benefit of either the whole or that part of your estate that will be left subject to the testamentary trust.
It is possible to establish a number of testamentary trusts under a will and name different trustees for each of them.
What ongoing costs are associated with establishing a testamentary trust under my will?
There are up-front establishment costs and after that it is mostly a matter of annual tax returns and any ad hoc advice that the trustee may wish to obtain.
How much money do I need to make a Testamentary Trust worthwhile?
This partly depends on whether you are more concerned about asset protection or tax benefits.
If you are uncertain about whether you will have sufficient assets in your estate, a testamentary trust can simply be included as an option in your will, with the executors and trustee(s) making the decision whether or not to implement the trust at the appropriate time.
Ultimately, it depends on your own financial circumstances. You should consult your accountant, solicitor, and financial adviser, to ensure that you are aware of all the advantages and disadvantages before you make your decision.
Call us today if you would like to talk about whether Testamentary Trusts could be useful structure for you.
Director – Wills & Estates Lawyer
Tim joined the firm in 2016 having worked solely in wills and estates across all Australian jurisdictions. Unsurprisingly, he comes to the firm with a deep passion for all things estates – whether it be estate planning, probate, estate administration, and estate dispute resolution. He uses his knowledge to bring clarity to estate matters and has a particular ability to come up with simple solutions to tricky estate planning needs. He particularly enjoys using his knowledge to save clients from unnecessary tax burdens.
Tim holds a Master of Laws (Applied Law) majoring in Wills & Estates, he teaches and tutors Wills & Estates at the Australian National University, and he is a member of the ACT Law Society’s Elder Law & Succession Committee.