Testamentary Trust

Setting up a testamentary trust is an important step in Estate Planning for many families.

A testamentary trust is a legal arrangement under a will that allows a person to transfer their assets to a trust upon their death instead of directly to their beneficiaries. This allows for many benefits, such as reliable financial management for younger beneficiaries and more versatility for tax purposes.

Our lawyers at Stephen Wawn & Associates have decades of experience in assisting clients with their will and estate planning. We can assist you with setting up a testamentary trust in NSW if you decide this is the best option for your circumstances. 

A testamentary trust is a trust that comes into effect after a person’s death. It is created through a will and allows an appointed trustee to manage the assets of the deceased person on behalf of the nominated beneficiaries.

The trustee can be a family member, friend, or a professional appointed by the deceased person. 

The beneficiaries can be family members, friends, or charitable organisations.

A testamentary trust can be discretionary or non-discretionary:

• A discretionary trust gives the trustee the power to decide how and when to distribute the assets to the beneficiaries.

• A non-discretionary (or protective) trust has predetermined rules about how the assets are to be distributed.

A testamentary trust is created when a person includes a trust provision in their will. 

When the person dies, their assets are transferred to the trustee, who then manages the assets according to the trust deed. The trustee has a fiduciary duty to act in the best interests of the beneficiaries and to follow the instructions outlined in the trust deed.

Testamentary trust beneficiaries receive income and/or capital distributions from the trust according to the terms of the trust deed. The trustee has the discretion to distribute income and/or capital to one or more beneficiaries or to accumulate income within the trust. 

The trust can continue for a specified period or until the death of the last surviving beneficiary.

The testamentary trust can be changed as long as the trust’s creator is alive, as this is before the trust comes into effect.

Control

A testamentary trust is an arrangement that allows you to maintain control over how your assets are handled after your death. 

You can specify how your assets are to be managed and distributed in your testamentary trust, such as outlining specific provisions for the ongoing care of dependent family members.

Asset Protection

A testamentary trust can provide asset protection from third-party influences such as creditors, bankruptcy, and divorce.

Taxation
A testamentary trust can be structured to minimise tax liabilities for the beneficiaries.

Flexibility
A testamentary trust can be tailored to meet the specific needs of the person’s family and beneficiaries.

 

Note: 

Testamentary trusts do have a major disadvantage. It does not avoid probate. 

Creditor Protection

A testamentary trust can safeguard beneficiaries from creditors. If a beneficiary receives inheritance in a testamentary trust and runs into debt, the creditor may not be able to access the inherited wealth, depending on the trust’s structure.

Income Splitting

A testamentary trust allows the beneficiary to distribute the trust’s income among other beneficiaries, including the beneficiary’s spouse and children. This can be particularly useful for paying school fees for minors, and such income is not taxed at the highest marginal tax rate.

High-risk Beneficiaries

A testamentary trust can protect a high-risk beneficiary from losing or dissipating inherited wealth. Examples of high-risk beneficiaries include those with money problems, who are bankrupt or involved in risky professions.

Children with Special Needs

A testamentary trust can be tailored to the specific needs of a child with disabilities or special needs, providing a way to ensure their care after your death.

• Trusts for children (minors and young adults) – this can be limited to 18 years of age or extend beyond that. If it is the latter case, your will should state that. 

• Trusts for adults who need assistance managing their finances. 

• Charitable Trusts

• Special Disability Trusts

• Trust for Accommodation

• • Life Interest – grants a beneficiary use of property and the ability to source income from it over their lifetime.

  • Right of Residence – grants a right to use the property but not take income. 

Like any legal document, a testamentary trust can be contested. However, contesting a testamentary trust can be more difficult than contesting other parts of a will. This is because the terms of the trust are set out in the will, and the testamentary trust trustee is bound to follow those terms. 

If the terms of the trust are clear and unambiguous, it can be difficult to successfully contest the trust.

However, there are some circumstances under which a testamentary trust can be contested, for example:

1. Lack of Testamentary Capacity: The person who created the trust did not have the mental capacity to understand the nature and consequences of their actions.

2. Undue Influence: The person who created the trust was coerced or manipulated into doing so.

3. Fraud: The person who created the trust was misled or deceived.

4. Knowledge and Approval: The person who created the trust did not know or approve of the contents of the will. 

5. Lack of Provisions: Someone could contest a testamentary trust if they are eligible to be a beneficiary of the trust and were left out or do not receive what they believe are adequate provisions.

If a testamentary trust is contested, it can result in a lengthy and costly legal battle. Therefore, it is important to consult an experienced lawyer to help you create a testamentary trust that will stand up to challenges.

At Stephen Wawn & Associates, we are experts in creating and managing testamentary trusts. 

Our team of legal professionals has years of experience helping clients in NSW, Australia, to protect their assets and ensure that their loved ones are taken care of after they pass away.

Creating a testamentary trust involves several steps:

1. Consult an experienced estate planning lawyer to draft a will that includes a trust provision.

2. Appoint a trustee who will manage the assets of the trust.

3. Decide on the beneficiaries who will receive income and/or capital distributions from the trust.

4. Specify the terms of the trust deed, including the powers and duties of the trustee, the rights and obligations of the beneficiaries, and the distribution of assets.

5. Sign the will in the presence of witnesses who are not beneficiaries of the trust.

Seek professional advice when creating a testamentary trust will ensure that it is structured properly and that all legal requirements are met so that it can come into effect without issue.

At Stephen Wawn & Associates, we understand that there is no one-size solution that fits all.

Everyone’s life and situation are unique, which is why the terms of your will and estate planning should also be. A testamentary trust might not be the right option for you, but we can help guide you to a solution that is.

We offer a free no-obligation discussion so that you can better understand what your will and estate planning needs may be, and get any burning remaining questions you have answered. 

Contact us today to learn more about how our testamentary trust lawyers can assist you.