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Testamentary trusts are fast becoming the preferred vehicle for a will maker who wishes to:
However, it is important that a testamentary trust is appropriate to the will maker's personal circumstances. This article discusses key considerations for any will maker or advisor when determining whether a testamentary trust is an appropriate structure.Julia Tonkin
A testamentary trust is a trust established under a valid will. A testamentary trust functions in a similar way to a discretionary family trust, with certain provisions of the will operating like a trust deed.
A will incorporating a testamentary trust will generally address:
As a testamentary trust is established by a will, it only commences following the will maker's death. This will be at the point when:
The main advantages of a testamentary trust are asset protection and access to tax benefits.
If the testamentary trust is well structured, then it can provide significant asset protection advantages for beneficiaries. This is because:
If a beneficiary is bankrupt, or likely to be made bankrupt, and is not the only person with control of the trust (that is, sole beneficiary, sole trustee and sole appointor), then it is likely that the trust's assets would not be considered part of the bankrupt's estate. This is because the beneficiary's interest in the trust's assets:
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If a beneficiary is:
then the trust assets may be exposed as they may be considered part of the marital asset pool which is able to be re-distributed by the Family Court.
If there is a concern regarding the stability of a beneficiary's relationship, the will maker or advisor should carefully consider whether to appoint the beneficiary as a trustee or appointor if the effect of the appointment would be to give them sole control of the testamentary trust.
The Family Court has shown an increased willingness to make orders to alter a party's interests in assets held in discretionary family trusts (which arguably also applies to testamentary trust structures), with the effect that those assets are no longer excluded from the marital asset pool.
Despite this, testamentary trusts for the most part still provide an effective asset protection vehicle as, generally speaking:
Where a beneficiary may:
it is advisable to establish a testamentary trust with an independent trustee to administer and protect their inheritance. These types of trusts are known as 'protective' or 'protected' trusts. To protect the beneficiary while the trust is in existence, a protected trust may include either a fixed structure for the distribution of income (or capital, at the trustee's discretion) or purely discretionary distributions.
Cleardocs is developing a document package that will allow a will maker to set up a protected trust within the will.
We have explored the tax benefits of testamentary trusts in a separate ClearLaw article here.
In short, when a distribution is made to a minor beneficiary of a testamentary trust:
Ideally, a testamentary trust should be integrated into the will.
A testamentary trust can be in a separate document that is prepared at the same time as the will or at a later date. However, a will maker or advisor should be careful to ensure that the terms of the testamentary trust are consistent with the will's terms, as any inconsistency between the two documents may lead to a long and expensive Court application to resolve any dispute.
To avoid this problem, Cleardocs is developing a document package that will allow a will maker to create a single trust for all beneficiaries or separate testamentary trusts for each beneficiary within the will.
A will maker must perform a cost/benefit analysis to determine whether the assets of the will maker's estate will justify the annual operating costs of managing a testamentary trust and the costs of compliance with tax obligations.
If the will maker has a beneficiary who is bankrupt, or is at risk of becoming bankrupt, having a testamentary trust may still be appropriate, despite the estate being of a modest size.
Like any trust, a trustee of a testamentary trust must:
Depending on who is appointed the trustee and appointor of the testamentary trust, there may need to be a high level of co-operation between family members to ensure the trust is operating effectively.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Private Client Services team.
Stay on top of issues affecting estate planning with the following resources from Thomson Reuters: Australian Financial Planning Handbook, Death and Taxes and Family Business Succession Guide. Available in book, ebook and online.
You can read earlier ClearLaw articles on a range of estate planning topics here.
 Section 98 of the Income Tax Assessment Act 1936 (Cth).
Julian Smith is a partner in the Maddocks Commercial team.
Julian advises extensively in the following areas:
Julian advises clients ranging from public companies servicing the wholesale financial services market to high net worth individuals and their advisers.
Julian has been with Maddocks since undertaking articles in 2001.
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