Testamentary Trusts

What is a testamentary trust?

A testamentary trust is a trust established by a person’s will and does not come into effect until after that person dies.

A trust is a way of holding assets for a beneficiary. It involves a person, called the ‘trustee’, holding onto and looking after a beneficiary’s share of a person’s estate.

The trustee does this by holding the estate ‘on trust’ while having the ability to pay particular amounts of a person’s estate to the beneficiary at such the times the trustee chooses or in accordance with the will.

For example, money could be distributed to a beneficiary in small amounts at staggered intervals, or provided to them for particular purposes.

A testamentary trust can also be structured in such a way that allows the trustee to pay income and capital to a particular beneficiary, as well as their spouse or partner, children and grandchildren, for example. Because of this, trusts are sometimes used for tax purposes.

Who could benefit from receiving my estate under a testamentary trust?

Testamentary trusts can be used in wills in many circumstances. They are often used where an intended beneficiary is:

• an addict – gambler, alcoholic, drug addict;
• a spendthrift;
• a bankrupt or potential bankrupt;
• involved in risky court proceedings or an occupation where they may be sued;
• a child;
• suffering mental health issues, mentally impaired, or incapacitated.

The above persons can benefit from a testamentary trust as it allows you to provide for them in a controlled manner.

What are the benefits of a testamentary trust?

A testamentary trust can provide many benefits, which include:

• tax savings;
• keeping and building wealth for future generations;
• allowing assets to revert to another person if the beneficiary dies;
• protecting ‘at-risk’ beneficiaries.

Who should I appoint as the trustee?

You should name someone that you trust and feel comfortable with taking on the role as your trustee. They are responsible for managing the trust and have many duties and obligations to follow.

They should be willing and able to act. It is beneficial, but not vital, if they have some financial or legal experience or a good history of managing their own finances.

Sometimes your trustee can be placed in a difficult position, particularly when they have the ability to determine how much, when and why money can be distributed to beneficiaries. Beneficiaries will not always agree with the decision of a trustee, so it is important you appoint a trustee who can handle this potential pressure.

Sometimes it is appropriate to appoint the beneficiary as your trustee. That way they have control over the distribution of their share of your estate. They may wish to spread the funds between themselves, their spouse and children for tax purposes, for example.

You can also appoint trustee companies or independent persons. Our wills & estates solicitors can discuss these options with you.