Protecting Your Estate and Your Beneficiaries with a Testamentary Trust

You may know that you can create a trust to protect your assets and control how any income generated will be distributed to certain people, but did you know that you can establish a trust upon your death pursuant to the testamentary wishes in your Will?  This is called a testamentary trust.

A Trust Created by a Will

The testamentary trust is an asset holding vehicle created by a Will-maker’s Will that only arises upon the death of the Will-maker.  The Will-maker can make specific distributions under their Will as normal, such as giving the antique crockery set to their great-niece, and then they can have the remainder of their estate placed in a trust and set out specific rules for their trustee(s) (the person / people in charge of running the testamentary trust) as to how the trust should be operated and for whose benefit (the beneficiaries).

The Key Players

• The beneficiaryis the person that naturally benefits from the trust.  A Will-maker can nominate anyone they like (and as many people they like) to be a beneficiary under their testamentary trust.
• The Will-maker must select a reliable and responsible person that they trust (no pun intended) to objectively administer the property and assets of the trust for the benefit of the beneficiaries.  This person is known as the trustee.  The trustee can be an incorporated entity or an individual (so long as they meet certain standards) and they can even be a beneficiary.  This is a big role, so the Will-maker should choose wisely.
• The Will-maker may be called the testator or settlor.  The settlor is the usual legal term for the person that creates a trust when they settle the trust with their signature.  However, because they will be deceased when the testamentary trust is created, it is more correct to refer to them as the testator, being another name for a Will-maker.

The Good, the Bad, and the Ugly

There are a number of pros for creating a testamentary trust through your Will, and these include:

• It may be preferable for a Will-maker to establishing and have a trustee control a structure that allows the ‘slow-drip’ release of a beneficiary’s distribution to ensure that it lasts for their lifetimes (rather than giving it to them in one lump sum as it would be under a normal Will), for those beneficiaries, who are known as spendthrifts or irresponsible gamblers.
• The assets of the testamentary trust are generally excluded from any court action (such as divorce or bankruptcy proceedings), which can be handy for a Will-maker who wants to protect a particular beneficiary when they can see trouble brewing in their foreseeable future.
• There are numerous tax advantages and concessions involved with having a testamentary trust, such as trusts not needing to pay tax on income that is distributed to beneficiaries, among many other things.

But there are also cons, such as:

• Testamentary trusts can be highly complex, which makes things confusing for trustees and beneficiaries, especially in circumstances where a beneficiary dies, dispute resolution is needed, or when approaching devolution of assets.
• The ongoing costs of administering a testamentary trust can be quite high and includes a number of parties, such as accountants, lawyers, and in some cases, the trustees themselves.
• There is an immense amount of responsibility placed on the trustee(s), and if they are unprepared for the role or simply careless in their duties of administering the trust assets, they can quickly find themselves in ugly situations, where they are liable for any loss incurred.

Is Creating a Testamentary Trust Right for You?

As we have described, testamentary trusts can be great options for a Will-maker, but only in certain circumstances because they are so complex and having a number of disadvantages.

If you are considering this as an option to protect your loved ones once you are gone, contact us so our Wills & Estates team can discuss whether a testamentary trust is right for you.

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Our team of lawyers provide clear and timely advice and services on all areas of Wills and Estates law Australia-wide. Given that the legislative requirements for the construction and content of Wills, their execution, probate and administration and more changes from jurisdiction to jurisdiction, it is highly beneficial to engage legal experts who are well-versed in these rules and regulations across all areas of Australia.

Contact one of our offices today to discuss any legal issues you may have from preparing Wills to challenging them.

By Steven Hodgson