Testamentary Trust Wills

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.

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.

Having trusts in Wills for your beneficiaries provides them with the following advantages:

Tax opportunities

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.

Asset protection

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.

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.

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.

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.

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.