What is a Testamentary Trust Will?
A Testamentary Trust Will is simply a Will which includes a testamentary discretionary trust for one or more of your beneficiaries. You can give that beneficiary control of the trust and if you do, that beneficiary will be able to operate the trust for the benefit of themselves and other beneficiaries. You can choose to limit beneficiaries to your blood or lineal descendants, or you can choose other beneficiaries who are relatives or friends.
The ways to obtain this valuable estate planning ‘vehicle’ are very limited. The Testamentary Trust must be created in your Will. It is a small window of opportunity, but the benefits can last for years.
Tax advantages of Testamentary Trust Wills
Placing a Testamentary Trust in your Will for your beneficiaries provides those beneficiaries with tax opportunities on income earned from an inheritance after it has been received into the Trust. The advantages are that the Trust can share income to get the benefit of individual tax thresholds and the significant tax free threshold applicable for minors in the Trust (such as your children or grandchildren).
The Testamentary Trust also provides greater asset protection of your inheritance for your beneficiaries than if you simply gave them the gift outright. Inheritances are larger these days than in the past, primarily due to increasing property prices and superannuation. Divorce and bankruptcy threaten to erode or even wipe out the inheritance you have provided, so it is important to consider the protective measure of a Testamentary Trust in your Will.
Testamentary Trust Wills are our specialty
Estate First Lawyers have long known the benefits of Testamentary Trust Wills and we have seen the benefits of having them in the estates we administer. We offer competitive fixed fee pricing on Testamentary Trust Wills which will be provided to you at our first meeting. We can also assist you with any other aspects of your estate planning that you might need help with.
At Estate First Lawyers, we provide estate planning across Australia, and we have offices in Queensland, Sydney and Melbourne. Please contact us today and ask about our ‘contact free’ Estate Planning service, which provides you with the same quality level of service from the comfort of your own home.
What assets can be held in a Testamentary Trust Will?
A variety of assets can be held in a testamentary trust. The most common include:
- Land or property
Trust capital refers to the money and investments held in a Testamentary Trust. Trust capital can generate income such as through interest or dividend payments on shares. It’s very common for assets to increase or decrease in value, resulting in capital gains or capital losses. This can present tax planning opportunities for the beneficiaries of a Testamentary Trust. A testamentary trust lawyer can provide expert advice on what existing assets you should include in a Testamentary Trust will as well as advice on general Estate Planning.
What are life-interest benefits?
A life-interest benefit gives a nominated person a lifelong benefit from a particular asset or assets. The person, however, does not inherit the asset itself. Some of the most frequent life-interest benefits include:
- Allowing a beneficiary to live in a property for the rest of their life (or a specified period of time). This property can be a fixed address, or the beneficiary can move to another equivalent property.
- Allowing a beneficiary to receive rental income from a property.
- Allowing a beneficiary to have access to a certain amount of funds during their lifetime.
Following the death of the nominated beneficiary, the assets can be passed on to other members of the family, charities or other parties as set out in your Will.
When can the assets of a Trust in Wills be distributed?
By law, the trustee does not beneficially own the assets within a trust and instead holds the income and capital of the fund on trust for the beneficiaries of the trust. The trustee can be a family member, friend, company or professional trustee organisation. Further, in most circumstances, a trustee can also be a beneficiary for the trust. The trustee’s role is to manage the assets in line with the best interests of the beneficiaries. There may be explicit instructions in the Will about when to distribute assets, or the Will may allow the trustee the discretion on when and how to distribute the assets within certain parameters (for instance, that it is within the best interest of the beneficiaries).
As well as the other previously mentioned benefits of Testamentary Trust Wills (asset protection and certain tax planning opportunities), there’s the added benefit of being able to control how and when your beneficiaries receive their inheritance. For instance, limits can be placed on how old a child can be before income or capital can be distributed to them, or when a child can become the trustee of the Trust (ie. it’s controlled by a family member until the child turns 25).
In addition, there are more specialised trusts that Estate First have tailored for situations where beneficiaries are incapable of managing their own funds (for instance, where the beneficiary is disabled, addicted to substances, or is a spendthrift). These are known as protective trusts and special disability trusts.
Contact our specialised testamentary trust lawyers at Estate First Lawyers to find out more about the most effective ways to distribute the assets in a trust in a Will.
Talk to Us Today
Please complete the form below. Alternatively, you can call us on 1300 132 567.
Our unique ‘4 easy steps’ makes the process easy
Expert Estate Planning with Fixed Fees
Meet With Your Lawyer
Whether we meet virtually or face to face, we will listen, answer your questions, craft your estate plan and provide you with a fixed fee quote.
We’ll Keep You Updated
You will receive draft documents to review. You can discuss your plan with us at any time you want.
Final Document Meeting
We will go through all of your final documents together to ensure the plan is exactly what you want.
Frequently Asked Questions
What is a testamentary trust in a Will?
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.
What is a Testamentary Discretionary Trust Will?
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.
What are the benefits of a testamentary discretionary trust in a Will?
Having trusts in Wills for your beneficiaries provides them with the following advantages:
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.
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.
What are the disadvantages of a Testamentary Trust?
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.
Can I get a Testamentary Trust for myself now?
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.
When does a Testamentary Trust start and end?
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.
What is a Lineal Descendants Trust and is it the same as a Testamentary Trust?
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.
"We could not have asked for better help than the advice & help we received from Estate First Lawyers. We have a real sense of security in knowing that our Wills are protected from challenge. Thank you so much for your effort & the detailed planning & presentation to us on the reasons you have created such a series of documents covering every aspect of our desires & the protection of our assets from challenge as far as it is possible to do so thank you."
"I sought the services of Estate First Lawyers as part of my retirement planning. They were great. The lawyer I saw was professional, knowledgeable and approachable. I am very happy with the advice and services I received and feel much more confident about my financial future. I have no hesitation in recommending their services, and feel that I received value for money."