What is a testamentary trust?

A testamentary trust is a trust established by the terms of a Will rather than by a trust deed, the rules of intestacy or a court order.

For example, a family discretionary trust deed is created while the Will maker is alive. In contrast, a testamentary trust is a form of discretionary trust that sits within the Will and only upon death is the trust “activated”, and when assets from the estate allocated to a beneficiary in the Will become available to a beneficiary via the testamentary trust.

There is a range of testamentary trusts that can be established and created for each and every beneficiary according to their needs and circumstances. For example, a will maker can place restrictions on how assets pass to beneficiaries, thereby protecting the assets of the estate. Such circumstances include:

1. A beneficiary undergoing a relationship breakdown.

2. A beneficiary becoming bankrupt or their assets being seizable by a creditor.

3. A beneficiary losing decision-making capacity; or

4. A vulnerable beneficiary such as a spendthrift or disabled.

For tax purposes, a testamentary trust has the ability to generate “excepted trust income” for beneficiaries who are minors, i.e. under 18 years of age. Excepted trust income is trust income that is not subject to the penalty rates that otherwise apply to a minor’s non-personal exertion income, which is also a key advantage of a testamentary trust. More tax-effective income from assets within the testamentary trust can be streamed to minor beneficiaries.

Testamentary trusts are said to be a mechanism to enable a Willmaker to “rule from the grave”. However, they often have more utility than protecting the next generation but protecting the family wealth of the first generation. Consider, for example, a husband who wants to protect his wife if he should pass away first and she should re-partner. The testamentary trust created under the husband’s Will can protect family assets if the wife re partners and there is a subsequent separation or breakdown of that relationship. Further, upon her death, the assets in the testamentary trust do not form part of the wife’s estate, so they reduce the impact if there was a family provision claim by the new partner.

Inherit’s legal bot can identify issues within a person’s estate plan that enable the Inherit lawyer to craft the appropriate form of a testamentary trust whether it is a beneficiary-controlled testamentary trust or a more restricted trust where the beneficiary only has access to the income of assets allocated to the testamentary trust.