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What is a Testamentary Trust Will?

Signing a Will
A Testamentary Trust Will is a trust established under a Will that is designed to provide maximum flexibility and allow for distribution of capital & income, as well as providing protection of your beneficiaries from third parties such as creditors.

The benefits of a Testamentary Trust Will are:

1. Flexibility on capital and income allocation

A trust allows for optimum allocation of income and capital, which in turn may permit beneficiaries to qualify for aged, disability and sole parent pensions, Austudy or the like, for which they would otherwise not have qualified under a normal inheritance.

2. Protection of beneficiaries

Your financial advisor will assist your executors to determine how best to manage your estate for the benefit of your beneficiaries, taking into account risk management, taxation and other issues.

The incorporation of testamentary trusts into a Will is not relevant to every situation but in many cases they offer valuable advantages over simple Wills. Testamentary trusts, sometimes referred to as a Will trust – which can be discretionary trusts, capital protected trusts or tailored to suit your requirements, are similar in many respects to trusts created by deed whilst you are alive.

Frequently Asked Questions:

  • What if everything is to be left to a single beneficiary?

    ​Trustee of a testamentary trust can be your surviving spouse or child (as the case may be). If flexibility is desired the trustee will control the gift as if they own the assets in the trust but will enjoy the protection afforded by the trust.

    Beneficiary Flow Chart

    If you wish to restrict the control your spouse or child has over the trust assets you can:

    • Use a third party as trustee, but still retain a discretionary trust.
    • Add a third party as a joint trustee along with your spouse or child, but still use a discretionary trust
    • Regardless of who the trustee is, restrict access to the capital in the trust by only allowing access to income and/or a percentage of the capital as determined by you (i.e. use a capital protected trust rather than a discretionary trust)

    Other special forms of trust (some with special taxation relief) are available and we can discuss these if appropriate. For example, trusts set up for a disabled person or to fund education of children may qualify for special taxation treatment. 

  • How does a Testamentary Trust Will work for 3 children?

    Trustee of each Will trust is one of the children. If flexibility is desired, the trustee will control the gift as if they own the assets in the trust but will enjoy the protection afforded by the trust.

    Beneficiary Flow Chart 2

    If you wish to restrict the control your child has over the trust assets you can:Use a third party as trustee, but still retain a discretionary trust 

    • Add a third party as a joint trustee along with your spouse or child, but still use a discretionary trust 
    • Regardless of who the trustee is, restrict access to the capital in the trust by only allowing access to income and/or a percentage of the capital as determined by you (i.e. use a capital protected trust rather than a discretionary trust)
    • Other special forms of trust (some with special taxation relief) are available and we can discuss these if appropriate.  For example, trusts set up for a disabled person or to fund education of children may qualify for special taxation treatment 
  • What succession issues can arise from ownership of trusts?

    It is important that you review trust deeds, as succession issues related to trusts can be complex.

    In a small portion of cases the trustee (whether an individual or company) determines the future control of the trust and its assets.  In such cases the succession of the role of trustee (if an individual), or ownership of shares in a trustee company (if a company trustee), must be specifically spelt out in your Will if you wish to expressly determine who is to take control of the trust upon your death. It is important to remember that control of the trust is for all practical purposes tantamount to ownership of the assets in the trust.

    In the majority of cases however, it is not the trustee who determines ultimate control of the trust. Most trust deeds provide that the future control of a discretionary trust is determined by a person described in the trust deed as an ‘Appointor’, ‘Guardian’, ‘Principal’ or similar. Such a person (usually the individual(s) who established the trust) will have the power to remove and replace the trustee and thus the succession of the ‘power of appointment’ is critical to the future control of the trust.

    Some trust deeds include detailed provisions regulating the succession of the power of appointment upon the death of the original appointor. Most trust deeds however simply refer the power also to the deceased appointor’s executor to manage.

    Thus it is critical that you determine how your trust deed deals with this issue. If the trust deed contains specific succession provisions you must ensure they are consistent with your succession planning wishes and if not, that you amend the trust deed to reflect your wishes.

    On the other hand if the trust deed refers the issue to the executor of your estate to manage then you must ensure that your Will includes specific instructions to your executor about how to deal with the succession of the power of appointment. That is, who do you want to pass that power to? Again keep in mind that this power effectively results in the person inheriting the power, inheriting all the assets in the trust.

    An important issue in succession planning is whether in future the trust will be controlled by one person or several? If this is not dealt with, children may inherit the power of appointment jointly, and this can lead to disputes over how the power is to be exercised.

    We recommend that if possible you pass the power of appointment to one beneficiary, to limit the potential for disputes.

    If one child inherits control of the trust and its assets, your Will can be drafted so that the net value of the trust assets can be treated as a benefit under the estate. Thus the estate’s executors can take that into account when ensuring the children obtain an equal distribution of all your assets, whether in the estate or falling outside your estate, because they are ‘owned’ in part by a trust in your control. 

    If, because of the value of the assets in the estate (or any other reason), it is not possible to leave the role of appointor to one child as part of that child’s inheritance, then we recommend that the trust deed include provisions requiring all decisions be made jointly, and in the event of dispute, that alternate dispute procedures are triggered. This will assist (but not overcome) any disputes. It is possible to include a provision which will trigger a winding up of the trust in the event of an unresolved dispute, with the trust deed specifying the joint appointors as the default beneficiaries so that on a forced winding up each receives an equal share. This can be achieved when first setting up a trust, while an existing trust deed can be altered to achieve the same result. However, care must be taken to avoid adverse stamp duty and other tax consequences if changes to an existing deed are proposed.

    Other more complex options such as trust cloning (splitting trusts into parts) are available and we will discuss them with you if they appear appropriate.

    We can discuss these issues in detail and ensure co-ordination/integration with your Will if you decide to create a trust.

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