ClearWill with Testamentary Trusts
What is a testamentary trust? And what is a testamentary discretionary trust?
A testamentary trust is a trust established under a valid Will. It begins after the Will maker dies. A testamentary trust functions in a similar way to other common trusts, with certain provisions of the Will operating as a trust deed.
Some testamentary trusts operate for the benefit of only one beneficiary, for example, protective trusts which are discussed below. Other testamentary trusts operate for the benefit of more than one beneficiary, and sometimes confer on the trustees a discretion to decide the proportions in which beneficiaries receive distributions of income and capital.
The trustees also have a range of other discretions, such as when distributions are made, how assets are invested and so on. It is for these reasons that testamentary trusts are often referred to as testamentary discretionary trusts. These trusts may, of course, take many forms and confer a wider or narrower range of discretions on the trustee.
Read our case study about creating testamentary trust.
Does ClearWill with Testamentary Trusts allow for testamentary discretionary trusts?
Yes, a will maker can establish one or more testamentary discretionary trusts (TDT) through Cleardocs. Using ClearWill with Testamentary Trusts, a will maker might establish a TDT to:
- give a specific sum of money or a specific asset (for example, a parcel of real estate) to a beneficiary in a TDT; and/or
- give the whole estate or the residuary estate to:
- one beneficiary in one trust;
- multiple beneficiaries, being a defined group (for example, siblings or cousins) in one trust;
- multiple beneficiaries in equal shares in a separate trust for each beneficiary; or
- multiple beneficiaries in unequal shares in a separate testamentary trust for each beneficiary.
Can I appoint my lawyer, accountant or financial planner (or any professional person) as an executor and trustee?
Yes, you can appoint your lawyer, accountant or financial planner as an executor and trustee. However, you should ask them whether they are willing to act.
If you appoint your lawyer, accountant or financial planner (or any professional person), it is likely that they will request a clause be included in your Will that allows them to charge fees for work they undertake in their role as executor and trustee. The Cleardocs document package contains a suitable 'charging' clause.
For Victorian Customers
If you reside in Victoria and appoint a professional person, before executing your Will, you will also need to provide written informed consent to the professional person charging a fee. This product does not include the form of consent.
What is a right of residence trust?
A right of residence trust generally has the following characteristics:
- a specific residential property is given to a trustee on trust to allow a specific beneficiary (or even a class of beneficiaries) to reside
in the residence for a period of time following the will maker's death. The period may be:
- the life of the specific beneficiary;
- a specific period of time; or
- until the occurrence of a defined event, such as the marriage of the specific beneficiary;
- often the trustee will have the power, at the request of the specific beneficiary, to sell the residence and purchase a replacement residence;
- this right does not generally extend to enabling the specific beneficiary or beneficiaries to receive income from the property, such as income received from renting the property.
What is a protected trust?
A protected trust is a trust that enables a will maker to quarantine all or part of their estate in a separate trust for the benefit of a specific 'protected' beneficiary, a class of beneficiaries and possibly future generations. Generally, the trustee has the discretion to use any part of the trust's income or capital for the benefit of the protected beneficiary.
Examples of situations where a protected trust may be appropriate include;
- where the beneficiary has an intellectual disability;
- where the beneficiary is vulnerable due to issues such as drug, alcohol or gambling addiction; and
- where the will maker has other concerns about the beneficiary's ability to manage their financial affairs.
What is a life interest trust?
A life interest trust is a trust that enables a will maker to quarantine all or part of their estate in a separate trust and direct that a specific beneficiary, or a class of beneficiaries, receives income from the trust for their lifetime or a defined period of time.
As distinct from some other testamentary trusts, a beneficiary does not generally have access to the capital of the trust, but instead receives income (often at a specified rate) during their lifetime or defined period. On the beneficiary's death, the life interest trust is generally wound up and the assets distributed to the remainder beneficiaries.
What is a superannuation proceeds trust?
A superannuation proceeds trust is a trust that is set up to receive superannuation death benefits of the will maker following their death. Generally the trust is similar to a testamentary discretionary trust, however beneficiaries are limited to persons who were death benefit dependants (as defined by the Income Tax Assessment Act 1997 (Cth)) of the will maker at his or her death. If the only beneficiaries are death benefit dependants, then no tax is payable by the estate on the receipt of the death benefit.
What role does an Umpire have in a trust?
The Umpire's role in a trust is to resolve any disputes that may arise between trustees or between appointors. The Umpire has the ability to make a decision or refer a dispute to mediation or arbitration. It is important to have a clear and efficient dispute resolution procedure to ensure the management of the trust is not disrupted. Read our case study about benefits of appointing an umpire.
Can the will maker appoint successors to the trustee positions they hold?
A will maker can appoint successors to the trustee positions they hold provided the relevant trust deed says they can. Read our case study about benefits of appointing a trust position successor.
What happens if a specific asset is gifted to a person in a Will but that asset is subsequently sold or lost?
If a specific asset gifted in a Will is subsequently sold or lost, the gift fails.
To avoid this situation, you can:
- leave a monetary gift; or
- include a broader description in the gift clause, for example, 'any private vehicle I may own at my death' as opposed to specifying a particular make and model of vehicle.
In the circumstance where the asset was dealt with by a person appointed as power of attorney, the gift may not fail altogether. For further information, you should seek independent advice.
What are 'descendants in substitution'?
Descendants in substitution are generally the children and other descendants of a primary beneficiary of the trust. This means that if a beneficiary were to pass away before they became a primary beneficiary, their children can take the interest of their parent preserving a chain of inheritance for a particular line of a family.
Does the Will allow the executor to quarantine superannuation death benefits?
Yes, the Will allows the executor to quarantine superannuation death benefits into a restricted form of testamentary discretionary trust. Instead of the trust having a wide range of discretionary beneficiaries, the beneficiaries are limited to persons who qualify as death benefit dependants. This type of trust is often called a 'superannuation death benefits trust' or 'superannuation proceeds trust'.
Why would the executor want to quarantine superannuation death benefits?
Generally the beneficiaries of a superannuation proceeds trust are limited to persons who were death benefit dependants (as defined by the Income Tax Assessment Act 1997 (Cth)) of the will maker at his or her death. If the only beneficiaries are death benefit dependants, then no tax is payable by the estate on the receipt of the death benefit. If the executor does not quarantine the superannuation death benefits in such a trust, if any beneficiary who may receive the death benefit is not a death benefit dependant, then the taxable component of the death benefit may be taxed. Read our case study about quarantine superannuation death benefits.
Does the testamentary discretionary trust allow the executor to adjust the entitlements of beneficiaries?
Yes, the testamentary discretionary trust provides the executor with the discretion to adjust the entitlements of beneficiaries in the distribution of the estate assets. Examples include adjusting for superannuation benefits, or assets of an existing trust, which pass to a beneficiary outside of the estate.
Why should the executor have the power to adjust the entitlements of beneficiaries?
In some instances, the power of an executor to adjust the entitlements of beneficiaries is necessary to achieve the will maker's intentions.
This is illustrated by the following case study.
Tom has two children, John and Sue. Sue is aged 17 years and still lives with Tom and is dependent on Tom. John is aged 20 years and lives away from home and is no longer dependent on Tom. Tom's only assets are his home worth $600,000 and his superannuation worth $200,000. The superannuation is held in a retail fund. Tom intends all his wealth to pass equally to John and Sue. His Will leaves his estate assets to them equally. However, as superannuation is not an estate asset, the trustee of the superannuation fund may decide to pay the superannuation direct to Sue. Overall, John would receive $300,000 and Sue will receive $500,000. If the executor is able to adjust entitlements, John could then receive $400,000 from the estate and Sue would receive $200,000 from the estate and $200,000 from superannuation. The adjustment provision thus enables Tom's wishes to be achieved.
Should a will maker have one testamentary trust for all beneficiaries or multiple testamentary trusts?
The question whether a will maker should create single or multiple testamentary trusts must be considered on a case by case basis. Relevant considerations include:
- having one testamentary trust for all beneficiaries would generally have less on-going costs (for example, accountancy fees) than multiple trusts;
- it is arguable that one trust for all beneficiaries offers greater protection for the assets of the trust in the event of the bankruptcy or relationship breakdown of an individual beneficiary;
- individual trusts where each primary beneficiary has effective control of their own trust is generally preferable where there may be concerns that multiple beneficiaries may not agree in the administration of one trust; and
- individual trusts give greater autonomy to each beneficiary as to how they can pass on their entitlement in the event of their own death.
What is a minor's trust?
A minor's trust is designed to manage and protect assets for a child until they reach a specified age. Some minor's trusts are intended to provide funds to benefit a minor during childhood. Others may not allow any expenditure, with the goal being simply to hold and protect funds until the minor reaches adulthood.
Some trust deeds specify that trust funds may only be used for specific purposes, such as education, or medical expenses, particularly in instances where a minor has a disability or illness.
A minor's trust can be created by a person to operate during their lifetime or alternatively, upon their death by a provision in their Will. If created by a Will, any income received by the minor is generally taxed at normal adult rates and not the penalty rates which apply to unearned income received by minors from other sources.