- What is a Testamentary Trust?
- Key Benefits of Testamentary Trusts
- Costs of Setting Up a Testamentary Trust?
If you are planning your estate and considering how best to manage and distribute your assets after your death, a Testamentary Trust can be an essential tool to ensure your wishes are carried out. At Owen Hodge Lawyers, our expert team can help you navigate the complexities of Testamentary Trusts and guide you in creating a plan that secures your assets and protects your loved ones. Learn more about the benefits, costs, and process involved in setting up a Testamentary Trust in your Will.
What is a Testamentary Trust?
Testamentary Trusts are created under a Will and therefore come into effect only after the death of the person who made the Will, the testator.
The principal objective of a Testamentary Trust is to hold and manage all or some of the assets and distribute it to the beneficiaries as per the terms outlined in the Will. To manage the assets of the Trust, a trustee must be nominated.
Key Benefits of Testamentary Trusts
A Testamentary Trust offers several advantages, including flexibility, asset protection, and income tax benefits. Here are the key benefits:
Flexibility for Beneficiaries
One of the main advantages of a Testamentary Trust is its ability to provide for the specific needs of beneficiaries over time. You can dictate how and when assets are distributed, ensuring that funds are used for designated purposes like education, medical expenses, or living costs. This level of control helps to protect your beneficiaries’ interests in the long term.
Asset Protection
Assets held within a Testamentary Trust are protected from creditors and potentially from ex-spouses following a breakdown of marriage or de facto relationships. This means your assets are shielded and cannot be accessed by others outside of the conditions you’ve outlined in the Trust.
Income Tax Benefits
A Testamentary Trust can provide significant tax advantages. Income generated by the trust can be distributed to beneficiaries in a way that reduces their taxable income. For example, income can be distributed to beneficiaries’ children who may not have other income, enabling them to take advantage of tax-free thresholds.
Protection from Irresponsible Beneficiaries
A Testamentary Trust is particularly valuable when beneficiaries are unable to manage their finances responsibly, such as minors or individuals with disabilities. The trustee manages the assets and ensures funds are distributed only for their intended purposes, protecting the beneficiaries from making financial missteps.
Incapacity
If a beneficiary becomes temporarily incapacitated, the Testamentary Trust allows the trustee or family members to manage the assets in the beneficiary’s best interest, rather than relying on an external authority.
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Costs of Setting Up a Testamentary Trust?
The cost of establishing a Testamentary Trust can vary depending on the complexity of the Trust, the size of the estate, and the number of beneficiaries involved. Generally, the process will involve legal fees for drafting your Will and setting up the trust structure. While there are initial costs, the benefits of asset protection and tax minimisation can make it a worthwhile investment for those with substantial estates or complex family circumstances.
Our Wills & Estates Team
Frequently Asked Questions:
A Testamentary Trust is created within your Will and only comes into effect after your death. A regular trust, by contrast, is created during the lifetime of the person setting it up and can be used during their lifetime.
A Testamentary Trust holds assets for beneficiaries and distributes them according to the terms of the Will, typically over time and for specific purposes such as education or healthcare.
To set up a Testamentary Trust, you need to include the trust provisions in your Will and appoint a trustee who will manage the assets according to your instructions.
The executor of your Will is usually the person who manages the estate after your death, but a different trustee can be appointed to manage the Testamentary Trust.
You can access funds from a Testamentary Trust through the trustee, who distributes money based on the terms set out in the trust (e.g., for education or health-related expenses).
Income generated by a Testamentary Trust is taxed at special rates, potentially offering tax advantages for the beneficiaries, especially if the funds are distributed to children or other dependents.
Yes, the trustee of a Testamentary Trust can also be a beneficiary, but this may create conflicts of interest, so careful consideration is advised.
Beneficiaries are named in the terms of the Testamentary Trust section of the Will, specifying who will receive the assets and for what purposes (e.g., education, health, or maintenance).
Yes, a Testamentary Trust can be contested in NSW under the Succession Act 2006 (NSW). Family members or other eligible individuals can make a family provision claim if they believe they have not been adequately provided for in the Will. Such claims may seek to challenge the validity or terms of the Testamentary Trust.Â
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