Testamentary Trusts are trusts that arise upon the death of a testator, and are specified within their will. These trusts may address any portion of the testator’s estate.
These types of trusts are distinguished from inter vivos trusts, which are created during the testator’s lifetime.
Testamentary Trusts have certain tax benefits, by reducing the amount of tax payable on an inheritance. Testamentary trusts included in a will also help you organise your assets and safeguard your beneficiaries’ inheritances.
What Is A Testamentary Trust?
There is no such thing as a standardised template for a Testamentary Trust. They come in all shapes in sizes and must be tailored to the individual or group.
There are two main types of Testamentary Trusts however; they can either be discretionary or protective. Discretionary trusts allow the beneficiary full control over their inheritance. Protective trusts appoint a third party, such as a lawyer as joint trustee to preside over and manage the estate.
Who Is Involved In A Testamentary Trust?
There are four main parties involved in a Testamentary Trust:
- The trustor who specifies the trust be created. This is often the testator of the will, but may be set up in abeyance during their lifetime;
- The trustee, or executor, who is responsible in the execution of terms of the testator’s will;
- One or many beneficiaries, depending on the term s of the will;
- The probate court, is the final party involved in the process, and though not technically a third party, they will oversee the executor’s handling of the trust.
Why Should I Set Up A Testamentary Trust?
Setting up a Testamentary Trust has several benefits. It allows better control over the distribution of your estate as well as providing competitive tax incentives.
To Protect Your Existing Will From Undue Claims
There are greater legal protections in place to protect a Testamentary Trust than there would be in a typical will. By having a Testamentary Trust in place, you are better protected against undue claims from creditors.
Helps Keep Assets Within A Family
A Testamentary Trust can specify that assets be passed on to future generations in the event that a partner remarries with other children. These trusts can also specify under what circumstances the children can have access to the inheritance. They can also be released gradually over a long period time in a staggered format.
Inheritances can be heavily taxed, however a Testamentary Trust can minimise the amount of tax beneficiaries have to pay. Depending on the state or territory, beneficiaries may receive better tax treatment when it comes to Capital Gains Tax (CGT) and stamp duty.
Protection Of Superannuation From Tax
Life insurance and/ or superannuation payments may be better protected through a Testamentary Trust. Without a trust in place, you may have to relinquish up to 30% of your total superannuation.
Where To Get Help Setting Up A Testamentary Trust
Drafting a legally relevant Testamentary Trust may require professional assistance. It is recommended that you seek professional legal services in preparing a Testamentary Trust as part of your will.