What are Testamentary Trusts?

These are trusts created by your Will to provide flexibility to the beneficiaries of your estate. Your estate is held by the trustee (executor) for your beneficiaries and does not have to be distributed immediately. This allows beneficiaries to choose when they receive their inheritance. Testamentary Trusts last for 80 years and can pass between generations.

How do Testamentary Trusts operate?

Assets in a Testamentary Trust are not owned by the beneficiaries. A trustee is required to manage the assets held in the trust. This could be a company or the beneficiaries themselves.

Where there are multiple beneficiaries, each beneficiary has their own trust. Beneficiaries are not forced to take up a trust. There are many approaches they can take, for example utilising one trust and recording each beneficiary’s entitlements.

Third parties can be appointed to replace a trustee if required. For example, if a trustee is:

• Bankrupt;

• Facing divorce;

• Mentally ill or subject to an administration order;

• Incapacitated;

• Imprisoned; or

• Unwilling or unable to continue acting.
  

Advantages of Testamentary Trusts

• Tax Effectiveness - Tax is paid by the trust, not your beneficiaries. Trustees can distribute income from the trust in a way which minimises the tax liability for beneficiaries. This should be managed through an accountant.

• Protection - Your estate remains in trust and not in the beneficiaries’ names. This protects assets in the trust if a beneficiary goes bankrupt or is chased by creditors.

• Disabled Beneficiaries - Testamentary Trusts can be used to care for beneficiaries with the trustee distributing to pay expenses for their care or maintenance. Alternatively, a Special Disability Trust may be considered to preserve Centrelink or NDIS entitlements.

• Incapable or Untrustworthy Beneficiaries - You may not want a beneficiary to be able to personally access their inheritance, such as beneficiaries suffering from addiction or those at a high risk of litigation. The trustee can distribute as required to meet such beneficiaries’ needs or pay expenses directly from the trust.

• Minors and Younger Beneficiaries - You can set the age at which beneficiaries gain full access to their inheritance in a Testamentary Trust. Such as 18, 25, or 99. Beneficiaries can still receive distributions from the trustee to ensure they are looked after. The trustee may also pay for larger items directly from the Testamentary Trust, such as university or a secondhand car (to get to university).