A testamentary trust is an estate planning structure established in a Will to provide for beneficiaries while limiting their direct access to their inheritance. This trust comes into effect upon the testator’s death.
Testamentary trusts can be discretionary and/or protective:
In a discretionary trust, beneficiaries have the power to choose to receive their inheritance through the trust and can appoint or remove trustees.
In a protective trust, beneficiaries have limited control over the trust, and their inheritance is only accessible through the trust.
Testators can also set conditions that must be met before beneficiaries can access the trust funds, such as reaching a certain age.
The testator appoints a trustee to oversee the distribution of trust assets to beneficiaries. The trustee can be an organisation, such as the NSW Trustee and Guardian, or an individual chosen by the testator to carry out their wishes. Multiple trusts can be established within a Will, with each beneficiary having their own separate trust.
Establishing a testamentary trust in a Will offers several advantages:
- Tax Efficiency: Discretionary testamentary trusts provide tax benefits by allowing income gains, franked dividends, and capital gains to be distributed to family beneficiaries annually in the most tax-efficient manner.
- Income Splitting: Testamentary trusts facilitate income splitting, where a beneficiary can allocate trust income to other beneficiaries. This strategy can lower the overall tax rate on trust funds, especially when diverting income to children for purposes like school fees.
- Protection for Vulnerable Beneficiaries: Protective testamentary trusts are designed to safeguard beneficiaries who are unable to manage their own finances.
- Education Fund: Testators can establish education funds within testamentary trusts to ensure their children or grandchildren receive a suitable education.
- Asset Protection: Testamentary trusts provide protection from divorce, remarriage, and legal liabilities.
The Supreme Court has the authority to reclaim assets designated to a testamentary trust and redistribute them to claimants if there is evidence that the testator created the trust to intentionally avoid their moral duty to provide for entitled parties and dependents.
If you considering to draft you Will and would like to ensure that you beneficiaries are protected in the future or you would like to ensure that your assets are protected and preserved in a certain way, please contact our estates team who will be able to assist you with outlining the various options that are available to assist you with drafting the terms of your Will to include testamentary trust provisions.
