What is a Testamentary Trust?
It is a trust established under a will, but it does
not come into effect until after the death of the person making the will.
Is a Testamentary Trust Different from a Family Trust?
Yes. Although
both testamentary and family trusts have similar features, such as the
ability of the trustee to decide which beneficiaries of the trust will
receive income, there are considerable taxation advantages for infant
beneficiaries (those under the age of 18 years) under a testamentary
trust. Income received by
infant beneficiaries from a family trust will be subject to penalty tax
rates should that income exceed $641.00.
Under a testamentary trust, infant beneficiaries receive the full
tax income threshold of $6,000 tax-free, with income above that amount
being taxed at normal adult rates. Because
of the uncertainty as to whether the Federal Government will tax trusts in
the future, it is advisable that testamentary trusts be incorporated in a
will as an option that can be triggered as circumstances dictate.
Even if testamentary trusts are taxed at some future date, there
may still be significant tax or other advantages to your beneficiaries if
you include a testamentary trust as an option.
If you have a beneficiary who has an intellectual
impairment, you could leave part of your estate for that person's benefit
by naming that person as the primary beneficiary (but not a trustee) of a
testamentary trust. This will prevent unscrupulous persons from
taking advantage of the beneficiary with an impairment and protect his or
her share of your estate. Either a family member, professional
adviser or a trustee company could be named as the trustee of this type of
testamentary trust.
Who can be trustee of a Testamentary Trust?
Anyone you wish, 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 who you
know, and whom you trust to act in the best interests of those who are to
receive the main benefit of either the whole or that part of your estate
that will be left subject to the testamentary trust. It is possible
to establish a number of testamentary trusts under a will and name
different trustees for each of them.
If I left my estate to a Testamentary Trust and my spouse needed the
money, would my spouse be able to gain access to it?
Providing your spouse is a beneficiary of the
testamentary trust, the trustee could pay all or part of the capital
and/or income to your spouse, or to any other named beneficiary of the
trust.
Are there any other advantages of a Testamentary Trust apart from
taxation?
Yes. There
are several. A testamentary
trust could also protect beneficiaries from creditors, or litigants in
professional negligence claims and can also protect spendthrift or
intellectually impaired beneficiaries.
What should I consider before establishing a Testamentary Trust under
my will?
There will be ongoing administrative costs involved
in maintaining a trust, such as accountancy fees for preparation of trust
taxation returns. Factors
that you should take into account, include a consideration of whether the
income generated by your estate would be sufficient to warrant a
testamentary trust, or whether there are special needs such as a
beneficiary with an intellectual impairment.
If, for example, all your assets are owned jointly with another
person or by a family trust, there may be insufficient assets in your
estate to make the establishment of a testamentary trust worthwhile.
If you are uncertain about whether you will have
sufficient assets in your estate, a testamentary trust can simply be
included as an option in your will, with the trustee(s) making the
decision whether or not to implement the trust at the relevant time.
What if I already have a Family Trust?
The assets of your family trust will not form part of
your estate. If all assets
are presently owned by your family trust, there would be no point in
establishing a testamentary trust unless you planned to wind down your
family trust and transfer the assets in it to yourself.
Is it possible to set up a similar trust after my death if I don't
change my will now?
Yes, but there are limitations. The post-death trust
beneficiaries are limited to those who would have received a share in your
estate under the intestacy legislation (the law that applies where you do
not make a will). In
addition, the capital of the trust would eventually have to be paid to
those beneficiaries in the proportions to which they would be entitled
under intestacy. With a testamentary trust, the capital of the trust can
be paid to whomsoever the trustee decides amongst the beneficiaries.
What advice should I obtain before deciding to establish a
Testamentary Trust?
You should consult your accountant, solicitor and/or
financial adviser, to ensure that you are aware of all the advantages and
disadvantages (some of which will undoubtedly depend on your own
particular circumstances, both financial and family), before you make your
decision.
Alternatively, as stated previously, a testamentary
trust can simply be included as an option in your will to cater for future
changes in your circumstances or those of your beneficiaries.
For more information
contact:
Tony Rice or
Joan Sedsman
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