Testamentary Trust Wills

Written by Sam Ferraro

Testamentary trusts are created by a Will to provide a greater level of control over the distribution of assets to beneficiaries. They also allow for tax-effective distribution of capital and income as well as providing possible protection of your beneficiaries from third parties such as creditors.

A testamentary trust can continue for a period of 80 years if so required but it is also possible for the testamentary trust to vest at any earlier date if the trustee so decides.

A testamentary trust has a trustee (or trustees); a range of discretionary beneficiaries and in some cases an appointer who controls the trustee/s. It is the trustee who determines which of the beneficiaries, if any, receive any income or capital from the trust and also the amount of income or capital they are to receive.

You put in place the terms of the testamentary trust in your will. These terms can restrict the ability of any of the beneficiaries to control the activities and investments of the trust or give them complete control. Further, you can select anyone to be the trustee, including the executors of your will, your spouse or partner, or your children. The trustee has effective control of the trust, so the trustee should be a person whom you know and trust to act in the best interests of those who are to receive the benefit.

There are two (2) types of testamentary trusts:

1. Discretionary testamentary trusts

This allows the beneficiary to use, invest, change and control assets freely. This type of trust provides maximum flexibility for tax purposes. It also provides protection of assets for your beneficiaries from third parties in the event of bankruptcy or family breakdown.

2. Protective testamentary trusts

This type of trust is designed to protect and preserve assets for the benefit of a beneficiary or for future generations. They may be used where the beneficiary is not in a position to responsibly manage their inheritance due to age, disability or spendthrift tendencies. Further, a testamentary trust can provide a high level of control and certainty as to when a child gains a particular asset and for what purpose.

The principal advantages of incorporating testamentary trusts in Wills

• Taxation benefits

• Capital Gains Tax

• Protection of Assets/Wealth Protection

• Creditors Protection

• Family law considerations

• Incapacity

• Flexibility

Unlike assets in superannuation funds, testamentary trust assets can be removed from the trust, borrowed or used as security. There are no requirements for a spread of investments or audited accounts and a trustee of a discretionary trust can act in a purely self-interested manner.

Testamentary trusts are quite complex and can be confusing, for more information, please do not hesitate to contact our office on (03) 9311 8911.