What is a testamentary trust and why would you have one in your Will?
There is a fair chance you already have one! It is a trust provided for in your Will, where someone looks after assets for someone else. Where children or grandchildren are possible beneficiaries and they have not turned 18, trustees are appointed under the Will to look after the assets gifted to them until they reach adulthood.
When you read or hear about testamentary trusts, they are usually talking about a special kind of trust set up in a Will. Assets left in a testamentary trust are held by a trustee for the benefit of several beneficiaries. The trustee has the discretion to give trust income or assets, to any beneficiary, at any time. These trusts are often used to give additional benefits to a specific beneficiary, or sometimes to ensure that the right people benefit from an inheritance.
If estate assets are held in a testamentary trust for the benefit of a whole family, no one family member owns a particular share of the estate assets. If your partner dies leaving their assets for you in a testamentary trust, and if you then have a claim made against you, your assets will be safe from attack.
Income from estate investments can be distributed from a testamentary trust in a way that minimises the total tax paid by the family. Income can be distributed to beneficiaries with less income from other sources, taking advantage of their tax-free threshold and lower marginal tax rates. Beneficiaries under 18 years of age are taxed as if they were adults – so receive the first $18,200 tax free!
Testamentary Trusts can also be used to preserve substantial assets for future generations, protecting the inheritance or family farm/business from one beneficiaries’ mismanagement or divorce.
Testamentary trusts are not a “one size fits all” product. Care is required to design a trust to suit your particular needs. They can be very useful, but are extremely dangerous if treated as an “off the shelf” product or if not crafted by someone who is a succession law specialist. If someone quotes a testamentary trust Will without having spent at least half an hour with you – don’t go there!