Testamentary Trusts

What is a testamentary trust?

A testamentary trust is a trust created by your Will, which comes into effect after your death. With a testamentary trust, a person or organisation (the trustee) is appointed to hold certain assets on trust for your beneficiaries. The trustee is granted wide powers to manage and distribute the assets in the trust on behalf of the trust’s beneficiaries.

Your Will

A testamentary trust must be established by your Will. Without a valid Will, then a testamentary trust cannot be established. You can learn more about drafting a Will and some other reasons it is important that you create a Will.

Choosing a trustee for your testamentary trust

Your Will can provide directions to the trustee as to how the trust assets are to be distributed, however, your trustee is granted extensive powers and discretion over the assets in your trust. Consequently, choosing an appropriate trustee is a critical decision, which you must carefully consider.

You can choose to appoint an individual trustee, such as a friend or family member or appoint a professional trustee, such as a company or law firm.

When making a decision in relation to your trustee (whether they are an individual or a professional trustee), some factors you should consider include:

• the suitability of any of your friends and family to hold the position (perhaps including consideration of their qualifications and experience);
• the fees associated with a professional trustee; and
• whether you may benefit from an independent trustee managing your assets.

What are the benefits of a testamentary trust?

There are various benefits of structuring your estate with a testamentary trust. Primarily, a testamentary trust can provide significant tax advantages and be a useful asset protection tool, such as in matrimonial matters, including separation and divorce.

A testamentary trust can be used to provide ongoing provision for the welfare and education of children and grant financial gifts to children once they reach a certain age.

If you want to provide a financial gift or ongoing provision to a beneficiary who cannot manage their own financial affairs (eg, someone suffering from an intellectual disability or with a gambling addiction), you can entrust the trustee to make suitable distributions from your estate.

When should I consider using a testamentary trust?

The use of a testamentary trust is not suitable for all estates. They are generally only used where an estate has significant assets.

The upfront and ongoing costs associated with establishing a testamentary trust in an estate are greater than planning associated with a simple estate or Will.

Management and administration of the testamentary trust takes time and involves the preparation of annual tax returns and accounts. If you choose to appoint a professional trustee, administration fees will also likely be charged and payable out of the trust’s funds.

Does a testamentary trust protect my estate from being contested?

You should be aware that a testamentary trust does not prevent your Will from being contested and a Family Provision Application being made by an entitled person who has not been adequately provided for.

It is important that you seek expert legal advice to ensure that your estate planning has been properly established and that all factors have been considered, including the risk of a contested Will.

How IM Lawyers can help

At IM Lawyers, we have the expertise to assist you in managing your estate and determining if a testamentary trust is right for you.