LEGAL BULLETIN – TESTAMENTARY TRUSTS

Within the area of estate planning one of the hottest topics is the incorporation of properly worded testamentary trusts into a will.

Testamentary trusts operate as either fixed or non-fixed trusts created by a will and which are funded by either the assets of the deceased estate or by payments to the estate after a death (e.g. superannuation death benefits or insurance proceeds paid to the estate).

Testamentary trusts can be divided into several categories ranging from an incredibly restricted trust designed to protect a vulnerable beneficiary to a full discretionary trust that has immense flexibility, asset protection attributes and income tax advantages.

Financial advisers and accountants typically recommend the use of testamentary trusts in a will as they provide the following benefits:

a)         asset protection for intended beneficiaries;

b)         an ability to transfer use, enjoyment and benefit from the trust free of transfer costs and with ease of access to funds; and

c)         income tax advantages.

The most common reasons for creating testamentary trusts in wills are to:

a)         ensure that the will is as far as possible adaptable to make changing circumstances of the intended beneficiaries of the estate; or

b)         to enable the will maker to “rule from the grave” and impose restrictions on beneficiaries.  This can be particularly important in the case of vulnerable beneficiaries.

Testamentary trusts can be mandatory or optional, fixed or non-fixed, flexible or protective and can:

a)         exist as a temporary arrangement until probate of a deceased person’s will is granted and the initial administration and division of the estate is finalised;

b)         endure for many years to provide flexibility, asset protection and tax advantages for a primary beneficiary;

c)         endure for the duration of a crisis (for example if the primary beneficiary has lost the capacity to make decisions, is bankrupt or is in the misted of a relationship breakdown); or

d)         endure as a more restrictive arrangement to provide needy or vulnerable beneficiaries with ongoing financial support.

Ultimately, the use of a testamentary trust should be carefully considered in the context of estate planning.  It may be the case that a testamentary trust is only worth including in a will if a person’s estate assets are likely to be sufficiently large for the savings associated with the trust to outweigh the cost of administering each trust.  The circumstances of the beneficiary will also often dictate the type of testamentary trust utilised.