A testamentary trust can be established in a person’s Will and the Trust commences upon death. The Trust then holds and protects all, or some, of the person’s assets, such as property and investments. The Trust holds the assets for the beneficiaries, the people or companies who benefit from the Trust. A Trustee is a trusted family member, friend or adviser named in a Will to manage the assets in the Trust. The Trustee follows the instructions in the Will about when and who to distribute assets to. They can distribute money or interest to any beneficiary at any time in line with these instructions. Sometimes the Will leaves it up to the Trustee to decide when and how to use and distribute the assets. They can then be flexible in meeting the needs and best interests of the beneficiaries.

The two key benefits of a Testamentary Trust include asset protection and taxation benefits.

Within a Testamentary Trust asset are held by the Trustee on trust and the beneficiary has no entitlement to a distribution until the Trustee sees fit. This protects the assets from any creditors or claimants as the assets are assets of the Trust, not assets of the individual beneficiary. 

This protection can be useful for beneficiaries who are in occupations where negligence or other claims are a risk, such as medical doctors and Company Directors, or where the beneficiary is experiencing solvency issues. 

Under a simple Will, an insolvent beneficiary will have no choice but to pass their inheritance over to their creditors whereas a Trustee of a Testamentary Trust could withhold any distribution to an insolvent beneficiary, protecting the asset. It can also protect assets when there are concerns a beneficiary is financially irresponsible, suffers from a drug dependency or gambles excessively. In these examples the Trustee can delay distribution until the beneficiary is less likely to squander the asset.

A Testamentary Trust can also provide asset protection in case a spouse remarries following the death of their partner. Assets can be left to a Testamentary Trust, rather than directly to the remaining spouse, protecting the assets for the benefit of the nominated beneficiaries (for example, the deceased’s children and grandchildren).

In terms of taxation benefits, under a Testamentary Trust, the income distributed to the beneficiaries is taxed in the hands of the beneficiary. For example, if the deceased left children or young adults who are studying and have no other taxable income, the Trust can distribute $18,200 tax free to the that beneficiary as that is the individual’s tax-free threshold. Under a testamentary trust, any income distributed to minors is taxed in the same way as if the minor was an adult, and the full tax-free threshold and marginal rates thereafter apply to all income distributed to any minors.

A Testamentary Trust can give you greater control over when and how your beneficiaries get their inheritance. If you are considering a Testamentary Trust, we recommend you contact our Estate Planning lawyers who can assist you with the preparation of your Will and Estate Planning documents. This is general information only and not intended as advice.