We’re all familiar with the operation of a simple will where a person’s assets are left directly to their nominated beneficiaries. However, in recent years as awareness has grown and people’s financial affairs have become more complex and the risks of leaving an inheritance directly to a beneficiary personally has become well-known, we’ve seen an increase in testamentary trust wills.
The phrases ‘testamentary trust’, ‘testamentary discretionary trust’, TT, TDT, are all just ‘lawyer speak’ for a trust set up in a will that starts when the willmaker dies. They are very similar to a family trust (more technically known as a discretionary trust) but a testamentary trust is established by a person’s will and remains dormant, ready to start when a person dies.
Testamentary trusts are one of the most powerful estate planning tools available. Here’s a snapshot of what you need to know about testamentary trusts:
Testamentary trusts may save your family tax after you die
Testamentary trusts offer protection of an inheritance from divorce and bankruptcy risks
Testamentary trusts are not just for complex situations or high wealth
You only get one chance to access the fantastic estate planning benefits of a testamentary trust – it MUST be in your will when you die
Testamentary trusts are not administratively burdensome
Testamentary trusts only start working if you die – the benefits don’t start until you die but neither do the (minor) compliance requirements
An effective testamentary trust should have many people who can potentially benefit from the assets in the trust (the technical term for these people are beneficiaries) and each beneficiary’s entitlement should be at the complete discretion of the Trustee.
This discretionary nature of the trust is what makes the trust so powerful for asset protection. Because none of the beneficiaries own the trust assets and their only right is to be considered by the trustee, it is very difficult for someone to argue that the assets of the trust belong to any one of the beneficiaries.
What are the key benefits of a testamentary trust?
Relationship protection
Protects immature beneficiaries
Income tax flexibility
Rule from the grave
Defers tax for overseas beneficiaries
Bankruptcy protection
If you’re considering a testamentary trust as part of your estate planning, get in touch with our Estate Planning Team today.
This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.