Mid Mountains Legal Blog

What is a Testamentary Trust?

Anthony Steel

Testamentary Trusts are created under a Will and therefore come into effect only after the death of the person who made the Will (the testator).

The principal objective of a Testamentary Trust is to hold and manage all or some of the assets and distribute them to the beneficiaries as per the terms of the Will. A trustee must be nominated to manage the Trust assets.

Who can be a trustee?

You can choose anyone to be a trustee, including the executor of your Will or your spouse. However it should be someone you trust, as the trustee acts in your beneficiaries’ best interests.

What is the difference between a Will and a testamentary trust?

A Will is a legal declaration by which a testator enforces their wishes to distribute their assets upon their death. It also appoints an executor and identifies the beneficiaries of your Will.

A Testamentary Trust is where the assets of the Will are held and managed by the trustee.

Who can be beneficiaries of a Testamentary Trust?

The same beneficiaries that you have outlined in your Will.

What types of assets are held in a Testamentary Trust?

  1. Investments;
  2. Land or property;
  3. Cash; and
  4. Other valuable assets, including paintings, furniture and jewellery.

What are the advantages of a Testamentary Trust?

1. Flexibility for the beneficiaries

A Testamentary Trust gives you flexibility in distributing assets to the beneficiaries.

You can set up a trust to suit your own individual requirements> you can also allow your children to use it for their own benefit.

2. Asset protection

Assets held by a Testamentary Trust are protected up to a certain level because they are held by a Trust – they are not owned by the beneficiaries. Consequently, assets held by the Trust are unavailable to the creditors or spouse of the beneficiaries following the breakdown of a marriage or de facto relationship.

3. Protection from irresponsible beneficiaries

The trustee holds the assets on behalf of beneficiaries who the testator considers likely to:

  • Be unable to handle their share by themselves, or
  • to spend their share irresponsibly.

4. Income tax benefit

The principal benefit of this kind of trust is the income tax redemption.

In a normal Will, beneficiaries usually invest the funds they receive to earn an extra income, which is added to their salary, and they pay tax at the usual marginal rates.

In a Testamentary Trust, the trustee distributes the Trust income to its beneficiaries. If the beneficiaries further distribute the funds to their children who are not working, then they can receive an income tax benefit for each child.

5. No cost for transferring assets to your trust

There are tax advantages to using a Testamentary Trust. Assets can be paid into the trust without paying transfer duty or Capital Gains Tax because the transfer takes place through your Will.

6. Superannuation & life insurance

Generally, superannuation proceeds fall outside of the assets in a deceased estate, and the distribution of the proceeds are determined by the rules of the fund. However, a testator may elect to direct the trustee of the superannuation fund to pay the proceeds of the deceased’s superannuation or death proceeds to their Legal Personal Representative (i.e. the executor).

The executor would distributed the proceeds in accordance with the terms of the Will. If the Will includes a testamentary trust, the executor may direct the proceeds to the trustee of the trust rather than distribute them directly to the beneficiary. Those assets would then be held in the beneficiary’s personal capacity.

The proceeds would then be distributed to the executor, who would have the discretion to distribute the proceeds using the testamentary trust established in the Will.

7. Incapacity

Where the beneficiaries are incapacitated, the Trust allows the family of the beneficiaries to manage the assets for their benefit (rather than relying on an external agency).

Can a Testamentary Trust be contested in NSW?

Yes, as a Testamentary Trust is established by a Will, it can be challenged or contested under the usual legislative provisions.

If you are contemplating setting up a Will with a Testamentary Trust, contact us for advice and assistance.

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