Testamentary Trusts

What is a testamentary trust?
A testamentary trust is a trust created by a will as compared to one created inter-vivos (that is before death)

What are the benefits of a testamentary trust?
• Asset Protection
As trusts are not owned by the beneficiaries a trust can therefore can offer a level of protection from creditors of the beneficiaries and/or spouse, in the event of a marital/relationship breakdown.

• Tax minimisation
Testamentary trusts allow the taxable income of the estate to be taxed more effectively through flexibility of distribution by allowing income to be distributed to those beneficiaries that pay the lowest rate of tax.

Beware that adult tax rates apply to children under 18 years of age and that children are not taxed at the penalty tax rates that normally apply to unearned income of children.

• Stamp Duty and Capital Gains Tax
As no stamp duty or capital gains tax is imposed on the transfer of assets on death to a testamentary trust, unlike the transfer of assets to a trust during ones lifetime, a testamentary trust is an opportune tax effective time to allow for tax planning by the se of such trusts.

What sort of decisions is an enduring guardian unable to make?
An enduring guardian cannot make a will for you, vote on your behalf, consent to marriage, manage your finances or override your objections, if any, to medical treatment.

Who can appoint an enduring guardian?
If you are over 18 years, you can appoint one or more people to be your guardian. When you appoint an enduring guardian you must have the capacity to understand what you are doing.

Who should use a testamentary trust?
• You have substantial assets and wish to engage in effective tax planning for your beneficiaries;
• Any of your potential beneficiaries might need asset protection;

Who has control over the assets of the testamentary trust?
A testamentary trust is controlled by your nominated trustee as set out in the will, and this can be any person, group of people, or company. Often the surviving spouse is the trustee until death and then control is passed to the children.

Consideration should be given to appointing an independent person as trustee of the testamentary trust if asset protection is important as where the trustee is also a beneficiary of the testamentary trust, and an administrator is appointed due to financial difficulty, the administrator may be able to direct the assets of the testamentary trust to creditors. Similarly, if protection from spouses/partners is required it is recommended independent trustees be considered.

Do all assets of the estate need to be transferred to the testamentary trust?
No, a will can have flexibility of leaving as many assets to the trust as is desired, with various other bequest operating outside the trust.

Can the testamentary trust be wound up when circumstances change?
It is important that a testamentary trust have a termination date and otherwise provide a trustee with power to terminate the trust at any time.

Can more than one testamentary trust be established in the one will?
It is common for the will to create a separate testamentary trust for each ultimate beneficiary, thereby allowing each beneficiary to take control over their share of the estate. However care must be taken to ensure that the goal of asset protection is not compromised.