There are many reasons why someone may wish to set up fixed or discretionary trusts in their Wills. It may be as a tax-minimisation strategy, as an asset protection strategy in the event of bankruptcy or family law proceedings involving a beneficiary or to protect a vulnerable beneficiary. We have set out for you below just two examples where a testamentary trust Will may be beneficial.
Liz is the grandmother of Harry and she has made a generous bequest to him in her Will.
Unfortunately, shortly after Liz dies, Harry is declared bankrupt.
Instead of the inheritance going to Harry or being used for the benefit of his wife Meaghan or their children, ALL the inheritance is ultimately claimed by Harry’s creditors.
This scenario can happen to any family – sometimes predictably but at other times all too surprisingly.
If Liz had set up an appropriately worded testamentary trust in her Will then Harry’s creditors may never have had access to his inheritance.
Brian is married to Penny, they have 4 children and 3 grandchildren (to date – they hope to have many more!)
Brian and Penny have said to their children that they will pay for the reasonable school fees for the grandchildren (Tetlow family: please note this is a fictional example!)
If Brian creates a testamentary trust in his Will which is controlled by Penny, then following Brian’s death Penny will be able to use the trust to distribute up to around $18,000 of the trust’s income to each of the grandchildren tax free.
At an earlier stage in life when Brian and Penny had 4 infant children, the same testamentary trust would have allowed Penny, on Brian’s death, to distribute up to around $18,000 in income from the trust for uses benefiting each of the children tax free. See worked example
What is a ‘Testamentary Trust’?
A ‘trust is where one party (the trustee) holds property for others (the beneficiaries).
A ‘testamentary trust’ is simply a trust created within a Will which comes into effect upon the death of the Will maker.
There are various forms of testamentary trusts and in this article I discuss some of these and give a worked example.
When should a person consider having a Testamentary Trust Will?
In my view every Will maker should consider if such an arrangement is appropriate, or would be useful, in their circumstances.
Here are some common situations where a testamentary trust may be useful:
- When it is possible or likely a beneficiary may go bankrupt;
- When the Will maker wishes to utilise possible taxation advantages for their spouse, family or other beneficiaries (again, see this article for examples);
- To assist a family member who is or may be going through Family Court proceedings;
- Where one or more people who will benefit under the Will are overseas taxpayers, while retaining Australian citizenship;
- Where provision is being made for a person with a disability;
- Where you wish to set up a long running trust for the benefit of your children or future generations;
- Where you wish to make long term provision for a charity, but want control of that money to be retained by trusted friends or family; or
- Where you wish to set up long term protective arrangements.
Setting up a testamentary trust is not ideal for everyone but is incredibly useful for some.
To get advice as to whether a Testamentary Trust Will is advisable in your circumstances, please do not hesitate to get in contact with myself, Brian Tetlow, or Emma Bragg on (02) 6140 3263 or email [email protected] or [email protected].