Many people approach their estate planning wanting to “keep it simple”. But if you want a Will that adequately protects your family and ensures the best possible financial position you’ll soon discover that a simple Will may not achieve what you want. That’s why we often recommend a Testamentary Trust Will (TTW).
In Australia, a TTW can be an invaluable instrument for safeguarding your family’s future. In this article, we explore the ways in which a testamentary trust can provide essential protection and benefits to your loved ones.
What is a Testamentary Trust?
A testamentary trust is similar to a standard family or discretionary trust except that it is only established in someone’s Will. It comes into existence only when that person dies.
These trusts have a number of significant benefits including asset protection, tax effective estate planning and creating a family legacy. Where funds are available in an estate to create a testamentary trust they can achieve far more than the direct gifts made under a standard Will.
A Will can establish more than one testamentary trust and the flexibility of a trust arrangement can give effect to a wide variety of specific wishes that the willmaker may have.
Why establish a Testamentary Trust in your Will?
There are many benefits to establishing a testamentary trust in your Will.
Asset Protection
Most people would be more than happy to personally receive an inheritance, however, for those people who have asset protection concerns or who may have personal liabilities, this can cause a problem.
People such as business owners and other professionals, or those in high risk occupations, will often prefer not to receive inherited assets in their own names. By instead distributing the assets to a Testamentary Trust, asset protection can be achieved.
Protection for Vulnerable Beneficiaries
Testamentary trusts are especially valuable when providing for vulnerable beneficiaries, such as minors, individuals with disabilities, or those lacking financial management skills. By appointing a trustee to manage the trust assets on behalf of these beneficiaries, you can ensure their financial needs are met without the risk of that beneficiary accidentally/intentionally depleting their own inheritance.
That said – not all testamentary trusts are created in equal, and in particular situations additional drafting is often recommended to balance the need to protect a beneficiary from themselves vs the risk of that beneficiary bringing a successful claim upon the estate for potential lack of adequate provision.
Protection from Relationship Breakdown
If a person receives an inheritance in their own name (via a standard Will), and then at a future date their relationship with a defacto partner or married spouse ends, that inheritance is automatically part of the property pool to be divided. Your beneficiary then has to argue to have their inheritance excluded from the property pool.
In comparison, the starting point for any inheritance held in a Testamentary Trust for a beneficiary is that these assets do not form part of the divisible property pool. It is then up to the ex-spouse to argue that this inheritance should be included in the property pool. How difficult this task is for the ex-spouse varies from case to case, and is often determined by the level of drafting undertaken by the estate planning lawyers when originally preparing the terms of the testamentary trust in the Will.
Protection from Future Blended Families
Any inheritance gifted to a beneficiary in a standard Will then becomes the beneficiary’s own property to deal with as they please in their own will (often, gifted to their spouse).
This may sound ok, however, consider:
- you pass away, and leave your wealth to your child;
- your child themselves passes away;
- in their Will, they leave their assets (including the inheritance received from you) to their spouse; and
- a few years later, their spouse repartners.
In this common scenario, your wealth has now taken a side-ways step, and is part of your children’s spouse’s new family (which includes their new partner, and potentially future children of this new relationship). Most people would not want this outcome – and would instead prefer that the inheritance passes down to their grandchildren (and future lineal descendants). An appropriately drafted TTW can achieve this.
Tax Planning Opportunities
Another compelling benefit of testamentary trusts is the potential for tax planning. Due to the discretionary nature of a testamentary trust, the trustee has the ability to distribute the income and capital of the trust across an entire family group (rather than being limited to one sole individual). This may mean that a more favourable tax position can be achieved for your children and their family.
Conclusion
A Testamentary Trust Will is a powerful tool for securing your personal legacy and your family’s future.
Please contact our Wills, Estates, Planning + Structuring Team to discuss whether a Testamentary Trust Will is the right option for your personal situation.
For more information contact Sheelagh Gray.
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