A testamentary trust is one established under a Will and one which comes into effect only after the testator or will maker’s death. In general, it will commence operation when the testator’s executor first transfers assets into the trust. A testamentary trust can last up to 80 years, however this time can be reduced if specified in a Will. The only essential elements in a testamentary trust are the existence of trust property, a trustee and a beneficiary (a person for whose benefit the trustee holds property).
These trusts are set up for the purpose of holding assets which a nominated trustee will then oversee once a testator has died. The trustee will eventually distribute the held assets to the beneficiaries under the Will or other testamentary instrument (document).
Common types of testamentary trust
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Discretionary testamentary trust
The elements of a discretionary testamentary trust are: the trustee, the assets, the beneficiaries and the discretion. The trustee of this trust is given an absolute discretion in distributing some or all capital and/or income. As it is discretionary, the trustee can distribute in various proportions, amounts and categories to the trust’s beneficiaries. Essentially, the trustee decides who gets what assets and when they will get them.
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Protective testamentary trust
This type of trust is established for the benefit of someone who cannot manage their own affairs. It is the trustee’s role to manage the assets in the most appropriate way and ensure the vulnerable beneficiary (for example, someone with a disability, mental illness or who suffers with addiction) is looked after. The will may attach specific conditions for the way the assets are used. For example, each financial year, a predetermined amount of income if offered to the beneficiary to be used for approved purposes.
Benefits of a testamentary trust
Under a testamentary trust, the trustee or trustees may choose to disburse the income that is generated by the trust in a manner that minimises the tax burden of the beneficiaries. However, the Trustees must act in accordance with the provisions set out in the Will for how the Trust is to be managed. It also provides greater protection for beneficiary assets in the trust as generally these assets cannot be accessed by creditors, given the assets belong to the trust rather than the individuals. In addition, the law does not currently allow claims on assets held in the trust to be made by separated spouses and partners during a property settlement.
How we can help
If you’d like more information about testamentary trusts or are considering altering your current will to implement a testamentary trust, contact our office today to discuss your options on (07) 3036 0649.