Since a testamentary trust has to do with death, it’s no surprise that most of us have no idea what it is or why we would ever need one. In fact, all things being equal, there are so many other concerns in our busy lives, that little details like death seem to be low on our list of priorities.
These trusts however, can offer distinct advantages to your beneficiaries, so it’s definitely worthwhile discussing these trusts with your lawyer. People with young children or disabled dependents, will find the advantages of these trusts particularly relevant.
What is a testamentary trust?
This is a trust that is established by your will and is created upon your death. As with other types of trusts, a testamentary trust is overseen by a trustee, who is bound by the terms and conditions of the trust, as outlined in your will or a separate document; the trustee can distribute funds or property according to your will. These trusts are very effective estate planning tools, due to the advantages they provide to your beneficiaries.
Advantages of a testamentary trust
One of the biggest reasons why these trusts are so popular has to do with tax. In fact, these trusts aren’t required to pay tax on any income, capital gains or franked dividends that are distributed to your beneficiaries; the trust however, does have to pay tax on undistributed income.
It is how the trust distributes this income to your beneficiaries that makes these trusts such an effective estate planning tool, because the trustee can take a hand in this distribution to minimise any tax obligations. So for example, the trustee can distribute these incomes in proportions that take advantage of each beneficiary’s marginal tax rates to minimise the amount of tax paid by each beneficiary; this works particularly well with children under 18 years of age.
Since these trusts give you control over the distribution of your inheritance, you can control how your beneficiaries spend this inheritance (to some degree) by releasing a set amount each year, instead of giving them their total inheritance in one lump sum. Money can also be released on an annual basis to help support special needs children over their lifetime.
These trusts are completely flexible and can be tailored to your exact needs.
Disadvantages of a testamentary trust
There are few problems with these trusts, and those that do exist are mainly due to its upkeep. Obviously there will be setup costs, and depending on the complexity of the trust and the assets that are transferred to it on your death, there may be additional ongoing costs as well. All of these latter costs will be paid by the trust itself, and may include reports written by the trustee and any fees for ongoing legal advice that may be required.
An additional consideration with a testamentary trust is that you must discuss the role of the trustee with the person you want to take that role. If they refuse, then you can nominate another person who agrees, but if you don’t do this then the courts can simply nominate anyone, and they might be a stranger who knows nothing about your family; if you make sure that the trustee agrees to their role however, this problem won’t be relevant.
