What is a Testamentary Trust?
A testamentary trust is a binding obligation on a person (‘the Trustee’) to distribute a person (‘the Testator / Testatrix’) property (‘trust property’) after they pass away in accordance with their Will for the benefit of persons name in a Will (‘the Beneficiaries’). The Trustee, owes a fiduciary duty to the beneficiaries and must always act in their best interest. The property in a trust is distinct from private property and the method of distribution is governed by the terms of the testamentary trust. A Testamentary Trust, does not involve a transfer of property between living people. Instead, it is is created by your Will after you die. It involves leaving some or all of your remaining property, into a trust fund which your Executor Will administer as a Trustee. The Trustee has discretion to distribute capital and income between beneficiaries named in your Will.
Why do I need a Testamentary Trust?
A Testamentary Trust enables you to provide to more beneficiaries and is versatile enough to respond to changing circumstances. It enables you support your children, grandchildren, and other dependents. This type of trust protects your property because your beneficiaries do not hold title to any assets in the trust. Instead, they hold a right to be considered by the testamentary Trustee as someone who should receive a benefit.
A Testamentary Trust has many benefits
- Protecting an inheritance during divorce or separation
- Protection from creditors
- Protecting assets from high-risk beneficiaries
- Tax minimisation and income splitting
- Maximising superannuation distribution
Helpful Questions & Answers
WHO CAN BE A TRUSTEE?
You may select anyone to act as the Trustee of your testamentary trust. However, we recommend that you select someone you know and trust. This individual will be responsible for acting in the best interests of your beneficiaries. A beneficiary, any individual who you have named in your Will to receive the benefit of your estate. Your Trustee is responsible for distributing your assets to your beneficiaries according to your wishes. Whoever you select will have complete and total control over the property in the testamentary trust (‘trust property’). Therefore, its important to select someone is trustworthy and will ensure your wishes are met after you pass away. There are strict requirements about who may act as a Trustee .
CAN I REMOVE OR REPLACE A TRUSTEE?
In South Australia, there are four (4) ways to remove a Trustee:
- By the express terms of the trust;
- Pursuant to a Statute;
- All beneficiaries agreeing to remove and replace the Trustee; and
- By order of the Court.
If you wish to remove the current Trustee of your Testamentary trust or you are are a beneficiary who wishes to have a Trustee removed, contact our estate planning lawyers for a free consultation.
PROTECTING ASSETS FROM DIVORCE OR SEPARATION
The assets in the trust Will remain untouched in the event of financial difficulty or a family breakdown. For example, if a beneficiary’s relationship ends in separation or divorce, the trust assets cannot be included in a property settlement because the beneficiary does not have legal title to the property. Trust assets are not considered individual property and therefore the Family Court cannot make an order requiring the distribution of trust funds. Therefore, the partner or spouse of an intended beneficiary cannot reap the benefits of an inheritance. This is worth considering if your intended beneficiary is in an unstable relationship.
PROTECTING ASSETS FROM CREDITORS
If an intended beneficiary has difficulty repaying creditors, and is at risk of being made bankrupt, the Will make may protect the trust funds so that the inheritance is not at risk of being paid to creditors or given to the Trustee in bankruptcy.
PROTECTING ASSETS FROM HIGH RISK BENEFICIARIES
The Trustee is provided with discretion to distribute trust income and capital to a specified beneficiary at any time they feel is best. This protects young beneficiaries from financial misadventure if they have not developed the financial discipline to manage an inheritance. It also protects assets where a beneficiary is in a high risk profession or part of a business where negligence claims may occur.
TAX MINIMISATION AND INCOME SPLITTING
Taxable income generated by the trust may be allocated to beneficiaries in a tax effective manner. The Trustee may split trust income among many intended beneficiaries under the trust, including your children, grandchildren, your children’s spouses, or other dependants of an intended beneficiary.
Tax savings may also occur where intended beneficiaries are not working, or under the age of eighteen (18). Children in particular may receive income as if they are adults, and income from a testamentary trust is taxed at a lower rate than from a family trust. By distributing income to many beneficiaries, and in particular those who earn or receive less income, the Trustee reduces the amount of income tax paid.
Superannuation benefits that would pass from you to your partner or vice-versa are better off being directed into a testamentary trust in your respective estates. Doing this increases the fund available for distribution of income through a testamentary trust to your children, grandchildren, and other beneficiaries.