Are testamentary trusts a good idea?
When writing a Will, you may consider creating a testamentary trust to protect your assets and reduce the tax paid by beneficiaries.
A testamentary trust offers greater control over the distribution of assets to beneficiaries. This can be particularly useful for blended families or vulnerable persons.
Are testamentary trusts a good idea?
Let’s take a look.
What is a testamentary trust?
A testamentary trust is a discretionary trust created by a will. It comes into effect after the will-maker’s death, upon which the assets can be transferred directly to the trustee of the testamentary trust. The trustee then has control of the trust and the distribution of its assets to nominated beneficiaries.
It is therefore important that the appointed trustee is someone you trust or a trustee company.
What are the advantages of a testamentary trust?
Testamentary trusts can protect assets and reduce the tax paid by beneficiaries from income earned from the inheritance. This can make testamentary trusts an effective estate planning tool.
What is the benefit of a testamentary trust? Let’s see:
1. Protection of assets
The testamentary trust owns the assets it holds, while the trustee(s) distributes these assets to beneficiaries who do not have access to the assets. This separation between control and benefit protects assets from potential legal action involving the beneficiaries.
The Will sets out the terms of the testamentary trust and determines the control of the assets. These terms restrict the ability of beneficiaries to control the distribution of the trust, thereby protecting the assets.
Commonly, testamentary trusts seek to preserve assets for future generations. However, it is crucial for the testamentary trust to be created properly by a solicitor to ensure that it appropriately and correctly protects your assets.
2. Flexibility for complex families
Estate planning can be complicated when accounting for former and current spouses, de-facto partners, or children of former spouses. Family situations can be complex, and a testamentary trust can provide a great deal of flexibility with the estate’s assets.
Where the will-maker has previous marriages, the assets from a prior marriage may be diverted to the benefit of a new spouse (and their family). A testamentary trust can provide for the situation where a spouse dies and the other remarries, as assets held in the trust can be protected for the benefit of the nominated beneficiaries, i.e. the deceased’s children.
In the circumstances of a blended family, the testator is able to draft a set of provisions in the event that the testator’s spouse/partner survives, and a different set to apply if the spouse/partner does not survive the testator. The testator is able to not only provide for a current spouse or partner, but also preserve assets for residual beneficiaries.
If a Will does not correctly incorporate a testamentary trust, there may be complications between family members after the will-maker’s death and the trust may fail.
3. Tax benefits
Depending on the nominated beneficiaries’ circumstances, a testamentary trust may assist them with reducing tax liability. Beneficiaries are able to distribute income to a range of potential beneficiaries.
4. Protecting other beneficiaries
Testamentary trusts are particularly beneficial for vulnerable beneficiaries.
These beneficiaries may include people with intellectual disabilities, illnesses, addiction problems, gambling or other weaknesses which could result in the dissipation of an inheritance. Testamentary trusts also allow for assets to be managed by the family for the benefit of children who may be considered temporarily incapacitated and other vulnerable beneficiaries.
Assets held in a testamentary trust are protected from a beneficiary’s creditors as the beneficiary has no access to the assets until the trustee determines the trust’s distribution. This protection allows vulnerable beneficiaries to avoid losing an inheritance due to unfavourable financial circumstances or bankruptcy or other reasons of vulnerability.
How to create a testamentary trust
Testamentary trusts are created in the Will drafting process.
It is imperative that your testamentary trust is drafted correctly in order to protect your assets and to give effect to your wishes to ensure that your estate is distributed as intended.
It is important to consult a solicitor about creating a testamentary trust.
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