Testamentary Trusts are legal structures set up as part of a will; similar to family trusts except they operate when the testator dies. These Trusts can contain part or all the deceased’s estate, and can substitute a normal transfer of assets to Beneficiaries under the terms of a will.

This Testamentary Trust is a great tool one can implement to isolate, protect assets, and maintain those assets over a number of generations if one wishes to create an asset portfolio for the benefit of the family, as trusts can operate for periods up to 80 years.

One benefit of creating a Testamentary Trust is there is greater control over what happens to the assets after one’s death. For example, it may be necessary to protect certain Beneficiaries who cannot, handle their own finances properly, take care of themselves, and although they should benefit from the assets in the estate, it is unwise to give them control. This is a useful strategy if a Beneficiary has high exposure to risk resulting from running a business, and it is not desirable or intended that the assets of the estate fall into the hands of creditors.

Another example is that a Beneficiary may have matrimonial problems and may be subject to adverse Family Court Orders. The Testamentary Trust can protect the assets of the estate that would otherwise be at risk in the event that Beneficiary faces these problems. In these examples, it is better for a Trustee to hold the assets under Testamentary Trust and look after the Beneficiaries, rather than giving them control over assets.

It is critical to obtain proper legal advice on the creation of a Testamentary Trust, which should occur at the same time as making of a will. The Testamentary Trust governs how the Trustee must manage the assets for the benefit of the Beneficiaries in the trust. It is also necessary to obtain legal advice before appointing one or more Trustees who can be a spouse, relative, or a professional representative.

One can stipulate special conditions for certain Beneficiaries; such as in the above examples where Beneficiaries cannot control their own money, or those who are at risk because of business ventures, or those who have potential or real matrimonial problems. The Testamentary Trust can give a spouse the legal right to use and occupy certain assets but ultimate ownership will vest in the children. This protects the children’s assets from attacks by creditors or if the spouse enters a new relationship.

The primary purpose of a Testamentary Trust is to protect assets. A consequential benefit is taxation. Trusts do not pay tax as long as the Trustee distributes all the income each year to the Beneficiaries. It is possible for a Testamentary Trust to allow a variation of income payments from year to year, and distribute to those Beneficiaries who will pay the least tax. The penalty tax rate that applies to unearned income by children under 18 does not apply to income from Testamentary Trusts. This means that each child can receive annual income up to $6000.00 without paying tax.  

RECOMMENDATION

It is appropriate you see Behan Legal to review your current arrangements and to determine whether you should take advantage of the benefits that arise in creating a Testamentary Trust.

NEED MORE INFORMATION

Behan Legal assists and advises on these important issues. For an appointment, call 03 9646 0344.