A testamentary trust, established through a will, serves as a tool to manage and protect assets for beneficiaries after the will-maker’s death. We’ve put together a detailed guide on the pros and cons of these trusts, to help you understand if they are suitable for your estate planning needs.
A testamentary trust is a type of trust created that comes into effect only after the death of the person who has made the testamentary trust will. In a standard will, assets are passed directly to beneficiaries. However, in a testamentary trust will, the assets are placed into one or more trusts as desired by the estate planning needs of the will-maker.
Testamentary trusts provide considerable control and flexibility over how assets are distributed. They allow the trustee to decide when and to whom the assets will be distributed. This flexibility ensures that beneficiaries receive their inheritance over time or when it is most appropriate, such as when they reach a certain age or when specific conditions are met.
A trustee named in the will manages these estate assets and distributes them, or the income they generate, to the beneficiaries as outlined in the trust terms. For clients seeking to safeguard their assets, ensure tax efficiency, and protect their families financial future, understanding manage a testamentary trust is crucial. Therefore, it is recommended that trustees and beneficiaries also financial and legal advice when receiving their inheritance under a trust arrangement.
Assets held in these trusts are shielded from claims against beneficiaries by creditors, lawsuits, or ex-spouses in case of divorce, as they are not directly owned by beneficiaries. This is particularly useful for beneficiaries who have personal financial difficulties. The trust structure ensures that the assets are protected from external risks.
Tax benefits arise because income can be allocated to beneficiaries in a way that reduces the effect of higher tax rates for minors and progressive tax rates for adults. This can lead to substantial tax savings, making the trust an attractive option for families. Beneficiaries include a broad range of family members known as secondary beneficiaries including and not limited to; cousins, grandchildren, nieces & nephews, siblings, parents, or any other family lineage.
For beneficiaries who receive government benefits, such as pensions, testamentary trusts can be structured to protect their eligibility. By keeping the assets within the trust rather than directly transferring them to the beneficiary, the assets may not be counted towards means-testing for benefits. This ensures that the beneficiary can continue receiving government support while still benefiting from the trust, for example, via a Special Disability Trust.
Administering a testamentary trust can be more complex and costly than a standard will. The ongoing management requires maintaining accounts, filing tax returns, and complying with legal obligations to act in the beneficiaries best interest as required by the Trustee Act 1958.
The succession of the role of trustee must be specifically spelt out in the Will, if the individual wishes to determine who will control the trust upon their death.
While testamentary trusts offer tax advantages, there are also potential downsides, particularly concerning capital gains tax. If assets within the trust are sold at a loss, these losses cannot be distributed to beneficiaries. Instead, they must be carried forward within the trust and offset against future gains.
Testamentary trusts offer a powerful tool for estate planning, providing control, protection, and tax benefits for beneficiaries. In contrast to a testamentary trust, a traditional will gives beneficiaries no choice but to take their inheritance in their own name – in some circumstances resulting in tax consequences and liability/protection problems. However, they also come with complexities and costs that must be carefully considered. Some people like to avoid complexity. Some people want to avoid what they perceive as unnecessary costs. For some people (depending on their assets and family circumstances), a testamentary trust provides no real benefit over a traditional, simple will.
Consulting with professionals who specialise in estate planning can help navigate these complexities and determine whether a testamentary trust is the right choice for your specific circumstances.
We can help protect your final wishes. The Hrkac Group can help you with making a will in Geelong, so if you are ready to take that next step to take control of your future, contact our Geelong-based Legal team at The Hrkac Group. Make an appointment today via our online form or phone our Geelong office on 5224 2366.
