What is Testamentary Trust?

A Testamentary Trust is a trust established under a valid Will and comes into effect upon the death of the Will maker.

A Will may contain more than one Testamentary Trust and be an option to take your inheritance utilising the Testamentary Trust or not and it may address all or any portion of the estate.

Each Testamentary Trust established may appoint separate Trustees and allows the Trustee to divide and distribute the income generated by the Testamentary Trust between the beneficiaries as they see fit.

Advantages and disadvantages

There are significant advantages to establishing Testamentary Trusts in Wills;

  • A Testamentary Trust is a legal entity with it’s own assets. This can offer some asset protection, either from creditors as assets cannot be seized, or from divorcing beneficiaries;
  • There may be tax advantages based on the trustee’s discretion of distribution of income received through the trust. Children who are beneficiaries of a Testamentary Trust can receive income and they are taxed at adult tax rates instead of penalty rates which means they can benefit from the ‘tax free threshold’ and receive up to $18,200 per annum from the trust without paying tax. This advantage also applies to low or non-income earning adults who are beneficiaries;
  • If you are concerned about a beneficiary’s capacity to manage their inheritance you can appoint another person as the trustee of their Testamentary Trust which means they will distribute income and assets to them as they see fit or according to the terms as outlined in the trust.

The disadvantages are;

  • No actual benefit for the Will maker unlike discretionary trusts which are created during your lifetime;
  • Testamentary Trust Wills are more complex and accordingly, they generally cost more to produce and it is important you engage a solicitor with knowledge of Testamentary Trust Wills;
  • There are ongoing fees associated with Testamentary Trusts such as Accountant’s fees and other fees during their operation;
  • Tax returns may be required to be completed and if a Company is the Trustee then they will also be required to complete tax returns.

So back to the original question; to have or not to have? The answer is dependent on each person’s situation, and it is important you receive the correct advice regarding your assets and wishes to provide for your loved ones for their futures.

If you feel you need some advice regarding Testamentary Trust Wills please contact our specialist in this area, Tammy Sava, Senior Associate of our Wills and Estates team, located at our Adelaide and Aberfoyle Park offices. Tammy will assess your requirements and provide personalised advice. Contact us today on (08) 8213 1000 to arrange a time to meet with Tammy.