What is a Testamentary Trust Will?
A Testamentary Trust Will is simply a Will which includes a testamentary discretionary trust for one or more of your beneficiaries. You can give that beneficiary control of the trust and if you do, that beneficiary will be able to operate the trust for the benefit of themselves and other beneficiaries. You can choose to limit beneficiaries to your blood or lineal descendants, or you can choose other beneficiaries who are relatives or friends.
The ways to obtain this valuable estate planning ‘vehicle’ are very limited. The Testamentary Trust must be created in your Will. It is a small window of opportunity, but the benefits can last for years.
Tax advantages of Testamentary Trust Wills
Placing a Testamentary Trust in your Will for your beneficiaries provides those beneficiaries with tax opportunities on income earned from an inheritance after it has been received into the Trust. The advantages are that the Trust can share income to get the benefit of individual tax thresholds and the significant tax free threshold applicable for minors in the Trust (such as your children or grandchildren).
The Testamentary Trust also provides greater asset protection of your inheritance for your beneficiaries than if you simply gave them the gift outright. Inheritances are larger these days than in the past, primarily due to increasing property prices and superannuation. Divorce and bankruptcy threaten to erode or even wipe out the inheritance you have provided, so it is important to consider the protective measure of a Testamentary Trust in your Will.
Testamentary Trust Wills are our specialty
Estate First Lawyers have long known the benefits of Testamentary Trust Wills and we have seen the benefits of having them in the estates we administer. We offer competitive fixed fee pricing on Testamentary Trust Wills which will be provided to you at our first meeting. We can also assist you with any other aspects of your estate planning that you might need help with.
At Estate First Lawyers, we provide estate planning across Australia, and we have offices in Queensland, Sydney and Melbourne. Please contact us today and ask about our ‘contact free’ Estate Planning service, which provides you with the same quality level of service from the comfort of your own home.
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Frequently Asked Questions
What is a testamentary trust in a Will?
A testamentary trust is simply a trust established in a Will. The trust has a trustee (controller) and one or more beneficiaries. A trustee can be a beneficiary. The testamentary trust comes into being after you pass away. It holds that part of your estate which you have gifted to it on the terms drafted in your Will. If no term has been stated, the trust will last up to 80 years from your date of death (in Qld, NSW and Vic). Terms can be included so that the Trustee can wind up the trust earlier.
What is a Testamentary Discretionary Trust Will?
A Testamentary Discretionary Trust (TDT) is a type of trust established in a Will. It is the most common type of testamentary trust Will in that it allows the Trustee of the trust the discretion regarding who amongst the trust beneficiaries to distribute the inheritance income and capital to. Often the Trustee is also a beneficiary of the trust and so can receive payments. In this way, the TDT functions in a similar manner to a family trust.
What are the benefits of a testamentary discretionary trust in a Will?
Having trusts in Wills for your beneficiaries provides them with the following advantages:
The Testamentary Discretionary Trust (TDT) can allow the Trustee to assign the income earned in the trust to different beneficiaries in the trust to take advantage of their different tax rates. This effectively allows the trust to income split, which can result in significant tax savings each year, particularly for minors (for example, children or grandchildren) who under Australian law enjoy much greater tax concessions in the TDT than in a family trust.
Read more about tax effective state planning strategies here.
Trusts in Wills also can significantly reduce the risk of the inheritance you give to a beneficiary going to third parties, such as a spouse of your beneficiary, or creditors. This can (and does) often occur where your beneficiary goes through a divorce, dies, or becomes bankrupt.
Read more about the importance of asset protection in estate planning here.
A properly drafted TDT is also an important inheritance strategy where your beneficiary is ‘vulnerable’ (for instance, has a disability, addiction or is a spendthrift, bankrupt or a ‘financially at risk’ person). Estate First Lawyers offer advanced trusts for ‘vulnerable’ beneficiaries in these situations, which are known as protective trusts and special disability trusts.
What are the disadvantages of a Testamentary Trust?
Once the Testamentary Discretionary Trust (TDT) comes into existence (that is, on the Willmaker’s death), the TDT will need to lodge a tax return each year from then on, if it earns income. This annual cost can be paid for from the TDT and should form a tax deduction.
The cost of establishing the TDT in the Will is paid for now by the Willmaker, even though the benefits of the TDT will be enjoyed by the beneficiaries after the Willmaker’s death.
Can I get a Testamentary Trust for myself now?
The short answer is ‘no’. You cannot set up a Testamentary Trust, like you can a family trust, unless you have received an inheritance from someone who has placed a Testamentary Discretionary Trust (TDT) in their Will for you. TDTs have significantly greater tax concessions for distributions to minors, and stronger asset protection in some instances.
The ability for your beneficiary to have a TDT relies on you to place one in your Will as it is not possible to obtain a fully flexible TDT in any other way. There is a limited ability for some beneficiaries to obtain a post death trust, but it is very restrictive, and expensive to establish post death.
When does a Testamentary Trust start and end?
The Testamentary Discretionary Trust (TDT) in your Will becomes effective only after your death and once an inheritance is placed into the TDT. Usually, there are terms in your Will to specify when the TDT will end. By law, in Qld, NSW and Vic, the TDT has a shelf life maximum of 80 years. It is common for the trust terms to allow the TDT to run for 80 years with the ability of the Trustee to end the trust sooner if they decide to.
What is a Lineal Descendants Trust and is it the same as a Testamentary Trust?
There are a few different types of testamentary trust and a ‘lineal descendants trust’ is one of them.
It is important to note terms like ‘lineal descendants trust’ is not a legal term, but a marketing or colloquial term coined to describe a type of trust which limits the beneficiaries of the trust to your relations or lineal descendants. The limitation may apply to distributing income and/or capital of the trust only to lineal descendant beneficiaries.
Discretionary trusts and testamentary discretionary trusts are the correct legal name and they normally include and ‘prioritise’ the lineal descendants, without restricting income or capital from being paid to certain other beneficiaries (such as extended family members, charities or religious funds and institutions and certain family trusts or family controlled entities). Including such beneficiaries provides potentially greater tax flexibility than a lineal descendants trust.
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