Testamentary Trusts: How to Protect Your Family’s Future

Sometimes, relying solely on a Will can expose your assets and future beneficiaries to risk. When planning for the future, most people think only of their Wills, whilst only a few people consider the powerful role that a Testamentary Trust can play in their estate planning to protect their family wealth. Testamentary Trusts are particularly valuable for families who want to safeguard their assets against unforeseen challenges and ensure long-term financial security for their loved ones. Testamentary Trusts can help to safeguard assets from creditors, reduce tax liabilities, and ensure financial security for your beneficiaries.

Testamentary Trusts protect family members by legally holding assets in trust rather than distributing them outright. This protects assets from creditors and divorcing spouses, ensuring they remain within your family’s control and are not lost through legal or financial difficulties.

What is a Testamentary Trust?

A Testamentary Trust is a type of discretionary trust that is established in one’s Will. A Testamentary Trust differs from a Family Trust, as it will only come into effect upon your death as specified in your will. In a Testamentary Trust, the assets of the person who created the Will are transferred to the Trustee(s) and held for and on behalf of any nominated beneficiaries. The Trustees manage the day-to-day operations of the Trust and employs their discretion within the scope of the Trust Deed to distribute Trust income and/or capital to any nominated Beneficiaries.

The types of assets that one is able to put in a Testamentary Trust can range from simple monies, all the way through to property and investments. Interests in a Business or Company can also be held on trust. The trust is established by the executor of the will and is governed by the terms set out in the will, giving trustees the responsibility to manage the estate according to the instructions.

Typically, a Testamentary Trust can last for up to 80 years. They can be revoked at any time through destroying the Will which establishes it and creating a new one. Testamentary Trusts provide structured financial support for minor children and grandchildren, preventing them from receiving lump sums they may not manage well. The trustee manages the assets on their behalf until they reach a suitable age or milestone.

How does a Testamentary Trust Assist in Protecting Family Wealth?

When it comes to protecting family wealth Testamentary Trusts are advantageous for a variety of reasons, some of with include:

1. Asset Protection

This facet of Testamentary Trusts comes particularly important if you have a beneficiary who carries risk of litigation. Nominated beneficiaries of a Testamentary Trust do not legally own the assets of the same trust until the Trustee has distributed such assets to them. This means that the Trustee is the one who legally owns the assets placed in the Trust. Thus, in this way Testamentary Trusts can act as a safeguard of these assets against creditors.

They also have an added role in protecting beneficiaries future assets when it comes to property settlement in the event of a divorce. If you have a beneficiary who is in the midst of divorce proceedings, Testamentary Trust provides a way to safeguard that the assets go to your beneficiary and not their ex-partner. A testamentary trust can be specifically designed to provide ongoing financial support to family members with special needs or disabilities, ensuring their inheritance is managed responsibly without affecting government benefits.

2. Reduction in Tax Liabilities

Testamentary Trusts also offer benefits when it comes to tax. In such a Trust, beneficiaries are taxed individually, only based on the income that they receive. As Trustees have flexibility when it comes to which beneficiary they distribute assets of the Trust too – this allows them the power to consider beneficiaries tax positions when making distributions. This means that the Trustee can allocate income to the beneficiary with the lowest marginal tax rate, maximising tax-efficiency.

Further, when it comes to beneficiaries under the age of 18 who are subject to a Testamentary Trust, they will be treated as a normal adult taxpayer. This means that they can claim the tax-free threshold on income received from the Trust. This contrasts to ordinary trust, where minors have to pay large sums of inheritance tax.

3. Ensuring Financial Security for Beneficiaries

If you know that you have beneficiaries who are not good at managing their finances, a Testamentary Trust offers benefits through ensuring future financial security for them. This is an especially significant benefit for those who have beneficiaries that are minor children, or individuals with special needs who you may not want to leave with a lump sum inheritance to manage. 

By selecting a Trustee different from the beneficiary of a Testamentary Trust, you can give an appropriate person control of the assets that your beneficiaries would be unable to handle or otherwise be irresponsible with. This helps protect vulnerable family members and provides peace of mind that their inheritance will be managed responsibly. Testamentary trusts can be tailored to include specific instructions to provide for stepchildren or blended family members, allowing the testator to fairly and clearly allocate assets among complex family relationships.

Additionally, Testamentary Trusts can be tailored to accommodate changing family circumstances, such as the addition of new family members, divorces, or special needs, allowing you to maintain control and flexibility in protecting your family’s future. Testamentary trusts reduce family disputes by giving trustees discretion to manage and distribute assets fairly, based on the trust’s clear terms, rather than forcing an outright division that can cause conflict.

Securing Your Family’s Future with Testamentary Trusts

Testamentary Trusts are a powerful estate planning tool designed to protect your family’s wealth across generations. They safeguard assets from creditors, reduce tax liabilities, and provide financial security for beneficiaries who may be minors or have special needs. By enabling trustees to manage and distribute assets responsibly, testamentary trusts help minimise family disputes and ensure your wishes are respected.

Overall, Testamentary Trusts are an Estate planning tool which is constructed to help protect your family wealth through safeguarding assets, reducing tax liabilities and ensuring financial security for beneficiaries. Families should choose trustees who are trustworthy, impartial, financially savvy, and able to understand and respect the testator’s wishes, since trustees hold significant power in managing and distributing the trust assets.

The Norton Law Group and our expert Wills & Estates team assists Sydney families in creating tailored Testamentary Trusts that suit their unique needs. We guide you through the entire process, ensuring your estate plan is clear, effective, and legally sound.

If you think a Testamentary Trust might be the right for you and your Estate planning, get into contact with our Wills & Estates team at The Norton Law Group to discuss today.

Secure your family’s future with confidence, contact us now for a confidential consultation.