Do you need a Testamentary Trust Will to best look after your family?

A Testamentary Trust Will doesn’t lock you in to anything and allows you to give your family future protections when you pass, as well as providing them with wealth management options and significant taxation benefits for beneficiaries.

A Will is a document that is signed by a will-maker that details:

  1. What is to be done upon their death with the assets they owned (the estate).
  2. Who will be appointed as the Executor and/or Trustee to carry out their wishes and to manage and administer any trusts (usually the same individual whilst being separate roles).
  3. Who will be the beneficiaries of the estate.
  4. Wishes in relation to the disposal of their body.
  5. Wishes in relation to the care, welfare, and guardianship of any of the will-maker’s minor children.

A ‘standard’ will

When drafting a Will, a ‘standard’ Will is the most common will drafted by lawyers. Whilst this type of Will can include some complicated provisions, for example protective trusts, life interests or rights to reside in property, and catering for blended families. A standard Will usually makes complete and straightforward gifts to family and friends, which means that the bequests are received by those people in their personal name and capacity. 

Whilst a ‘standard’ Will is often the cheaper option for will-makers it is not always the best choice available for some families.

A Testamentary Trust Will

A Testamentary Trust can be created by a Will. A Testamentary Trust is a trust established within the Will and allows a trustee to manage assets on behalf of the beneficiaries of the trust.

The terms of the Testamentary Trust are set out in the Will and the trust comes into existence when the will-maker dies. This can be one trust for multiple beneficiaries, but is most commonly a separate trust for each beneficiary.

What benefits can you get from a Testamentary Trust Will?

A Testamentary Trust Will has many benefits, including:

– significant taxation benefits for beneficiaries who can share investment income, from a taxation perspective, with other family members; and

– Protection mechanisms that will automatically be enacted if any of your beneficiaries are in a risky period of their life to receive an outright inheritance, at the time of your death.

Wealth management and taxation flexibility

If a will-maker was to die with a standard Will in place, their beneficiaries would have no choice but to receive their inheritance in their personal names. Therefore, any income generated by those beneficiaries on their inheritance (for example through rental returns, interest or dividends) would be taxable at the beneficiaries’ marginal rate. Depending on the size of your estate, this could cause beneficiaries to go from low rates of taxation, up to a much higher rate of taxation.

If a Testamentary Trust was in place, beneficiaries could distribute the income between spouses and children, even those children under the age of 18 years, which would significantly reduce the taxation payable. See diagram at the end of this blog post as an example of taxation differences between a standard Will and a Testamentary Trust Will:

Asset protection provided for in a Testamentary Trust

Testamentary Trusts can help to protect beneficiaries from losing inherited assets through a marriage or defacto separation, court litigation and/or bankruptcy. They may also protect a beneficiary from losing or wasting their inherence due to their lack of ability to manage money (due to age, immaturity, disability or drug/alcohol addiction).

A Testamentary Trust Will can dictate that if any of your beneficiaries are going through a marriage or defacto separation, engaged in court litigation, bankrupt, have significant health issues or are under the age of twenty five years, then that beneficiary cannot control the assets within the Testamentary Trust themselves, and instead this important role is entrusted to your Executors, who you have selected carefully. This provides a layer of protection for your family members accounting for some potential issues which may arise in their future.

When should a Testamentary Trust be used?

The answer to this question can be complicated and this blog should not be used as a hard and fast rule as to when a Testamentary Trust Will should be used. Every individual and their estate are different, and their situation should be discussed with an experienced estate lawyer.

Generally, a Testamentary Trust should be considered when beneficiaries:

  1. Will inherit an amount likely to generate income that would push them into a higher tax bracket;
  2. Are already earning or likely to earn a significant income;
  3. Are in need of, or wish to have, some asset protection; or
  4. Will require protection from themselves (for example poor money management) and/or third parties.

Estate planning is all about giving beneficiaries options and flexibility of how they wish to protect their inheritance. There is no downside to giving your beneficiaries the option of a Testamentary Trust as upon your passing they do not have to create a trust.

If I create a Testamentary Trust Will now, does that mean that I force my beneficiaries to receive their inheritance in a Testamentary Trust?

The answer is: No!  You are putting the tools in place now to simply give your beneficiaries this opportunity in the future. Upon your death, if you have a Testamentary Trust Will, your beneficiaries will have the choice of whether to receive their inheritance in a Testamentary Trust, or they can elect to receive their inheritance in their name, just the same as they would in a standard Will.  They can even elect a mixture of the two!

The only exception is that if any of your beneficiaries are in a risky period of life, such as going through a marriage or defacto separation, engaged in court litigation, bankrupt, have significant health issues or are under the age of twenty five years, then that beneficiary must receive their assets in a Testamentary Trust, until they are out of that risky period.

Otherwise, if all is well, each of your beneficiaries can make their own choice, independent of each other. For example, you may have three beneficiaries to your estate, two of which would like to take the option of creating a testamentary trust and one who may not. This flexibility is provided for in the Testamentary Trust Will and far outweighs the options provided in a standard Will.

If you are unsure whether a Testamentary Trust Will should be used, the answer is Yes!  Do it.  You are not locking anything in, but are giving your family future protections, and wealth management options.

If you would like a new Will, and would like to discuss whether a Testamentary Trust Will is right for you, please contact one of our experienced estate planning layers at either our Drouin or Warragul office, or head to our website and book an appointment online!

Emily Farr – Lawyer and Keira Jarred – Paralegal

Disclaimer: The information in this post is general in nature. This does not constitute legal advice and should not be relied on as such. Please contact one of our Lawyers if you are seeking advice about a specific legal matter.