Testamentary Trust


What is a testamentary trust?

Testamentary trust is a trust established under a Will.  A testamentary trust can be a fixed trust (that is the manner and time when the assets are to be distributed shall be in accordance with the directions as prescribed under the will); it can be a discretionary trust (that is the distribution is at the discretion of the Trustee); or it can be a hybrid (for example the time of distribution can be fixed, and how much each beneficiary will receive at certain time can be at the discretion of the trustee).

Discretionary testamentary trust is the most common species among the three.

What are the advantages to have a testamentary trust?

There are number of advantages on having a testamentary trust, the essentials are:

Minimising tax

Generally, transfer of real property under a Will does not attract stamp duty as opposed to transfer during life time of the will maker.  A beneficiary inherited property under a Will may be exempted from paying capital gains tax.

Testamentary trust provides further means in which tax can be effectively minimised.  For example, if the whole estate is distributed to a sole beneficiary, then that person will be taxed at penalty rate (higher rates), depending on the size of the estate.  If the estate is distributed to a number of beneficiaries, then each will benefit a tax free income from the estate provided the amount received is below the tax threshold.  Even if the amount received by each beneficiary is above the tax threshold, each beneficiary would be better off as they would still be subjected to a lower tax rate.

Protecting assets

The beneficiaries do not own property held under a trust unless and until it is distributed and transferred to the name of the beneficiaries.  Testamentary trust, especially discretionary trust can be used as a means to protect the trust assets in the following circumstances:
Divorce/ breakdown in relationship of a beneficiary:
If a beneficiary is in a ‘shaky relationship’ (such that the marriage or a de facto relationship is going to be dissolve in time), then the assets held in a testamentary trust is to be construed as a financial resource and may have some effect on terms of the property settlement.  But this is far better than the property being considered as an asset and being at the disposal of a Court order.

Creditor protection

If an intended beneficiary had a number of creditors and or is likely be at risk of being made bankrupt, or the beneficiary is in a high risk profession or business where negligence are likely, then a Testamentary Trust, especially a Discretionary Testamentary Trust will protect the trust assets by minimising its share and diverting most of the trust assets to other beneficiaries.

Protecting vulnerable beneficiaries

If an intended beneficiary receives a pension or a disability support, he or she may run a risk of losing their pensions if they were to receive a lump sum inheritance.   A Testamentary Trust enables them to have monies distributed to them to meet their needs from time to time with the effect that they are not at risk of losing their pension entitlements.

Testamentary trust can be useful for families who wish to provide for their spouse but are concerned that the spouse may remarry and divert the family assets to the new family, or use the family assets in risky or unprofitable venture at the suggestion of the new spouse.

What are the disadvantages to have a testamentary trust?

The first disadvantage is that the beneficiaries under the trust will not be able to get access to their inheritance until the will-maker dies.  In case of Discretionary Testamentary Trust, the distribution of trust asset is at the disposal of the Trustee.

There are also the costs of administering a Trust.  This includes but not limit to the accountancy costs of preparing a tax declaration which could be ongoing until the trust is dissolved.  There will be also legal costs involved should a solicitor be retained to administer the assets of the trust.

This list is not exhaustive.  It presents only some of the factors for consideration as to why a person should have a Will and why it should be prepared by a competent lawyer.

It takes years of studies and practical experience to draft a good Will.  Our years of experience in Will and Probate, estate planning and succession law and broad range of Family Law matters should enable us to provide you with legal advice in making a Will and prepare a Will for you.  Please contact us.


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