What is a Testamentary Trust?
It is a Discretionary Trust established in a person’s Will and comes into effect after the death of the Willmaker.
Commonly known as Testamentary Discretionary Trusts (TDT), they are similar to most Family Discretionary Trusts.
The diagram below explains the basic operation of a Testamentary Trust.
At Point A is the date of death of the Willmaker. The Executor’s role is to identify all assets of the Estate, pay out any debts or liabilities and distribute the Estate in accordance with the terms of the Will. This is known as the Executorship or Estate Administration period.
At Point B, the Executor will distribute the residuary Estate to the beneficiaries named in the Will.
If a beneficiary is a TDT then the net residue Estate is distributed to the TDT for the benefit of one or more beneficiaries named within (usually the children and grandchildren). The period between Point A (date of death) to Point C can be up to 80 years.
A Willmaker can establish more than one TDT within his/her Will, this is generally the case where there is two or more children. It is good practice to set up one TDT per child if circumstances permit.
Who controls the Testamentary Trust?
Whoever the Willmaker decides to appoint as the Trustee will control the TDT assets. For example, if a Willmaker leaves his/her Estate equally to his/her three children it is not uncommon for the child to control the TDT set up for that child in the Will. The Trustee can be granted full discretion (or no discretion) as to who should receive the income and capital from the TDT. The Trustee is often the same person who is the Executor of the Will and is usually also a beneficiary of the Trust.
Why are Testamentary Trusts used?
TDT’s can be used for a variety of purposes including:
- Minimising both income and capital gains tax;
- There are significant tax advantages for distributing income earned by the TDT to beneficiaries under 18. This is a distinct feature which is not available in normal family discretionary trusts;
- Keeping an inheritance out of the reach of the Family Law Court where a beneficiary is involved in a matrimonial property settlement;
- Protecting spend thrift beneficiaries or children with addictions (for example, gambling, drug and alcohol);
- Caring for grandchildren, their education and also mentally disabled and physically disabled beneficiaries;
- Protecting adult beneficiaries who are employed in occupations of high risk of Litigation or who own a business;
- In limited circumstances, avoiding the loss of a beneficiary’s Government sourced pension or benefit.
From 1 July 2012, if a child beneficiary receives income from a TDT they are taxed at normal adult rates. This means that approximately $18,000.00 can be distributed to each child beneficiary free of tax per annum.
Our OMB Solicitors Estate Planning Managing Partner, Richard Dawson, can discuss the advantages and disadvantages of establishing a TDT within your Will. We will discuss in our meeting whether a TDT is appropriate to you and your family circumstances and the costs of setting up a TDT in your Will.