Not all Wills are executed the way you intended them. To ensure your estate is distributed the way you instructed, you can take additional steps in the form of a Testamentary Trust.
This post is written in everyday language so that anyone reading it can gain some insight concerning the topic of Testmentary Trusts. I am not a Lawyer or an Expert on Wills, Intestacy, Trusts, Estate Planning or any of these related topics nor am I qualified to give advice. Professional advice is always available when you are making decisions surrounding your Estate, belongings and dependants when you die. I reside in Australia therefore much of what I discuss relates to Australian Law or the relevant State in Australia. Regardless of geographic location, the topics on my website are intended to provide a starting point for your investigation.
The purpose of this post
⦁ To bring awareness to this type of Will addition called a Testamentary Trust and under what circumstances people might utilise one.
⦁ To provide some of the information surrounding Testamentary Trusts.
⦁ To provide a starting point for your own investigation.
What is a Testamentary Trust?
It is a Trust which is activated at time of death of the person who has left the Will. The Will contains reference to the Trust. A Trust account is setup to hold the proceeds of the estate for distribution. The Trust can contain all or part of the estate as instructed
Scenarios that might not be covered sufficiently in a regular Will
You die and your spouse inherits your estate. Your spouse later remarries. Your spouse dies and leaves their estate to their new spouse. A large portion of your spouses estate included the inheritance from your estate. Had you known about Testamentary Trusts, your estate will have remained intact even after your spouse died and your nominated beneficiaries would continue to receive the proceeds such as your children and future generations.
You die and as you have no surviving spouse you leave your estate to your adult daughter. Your daughter soon goes through a marriage breakup. Her inheritance from your estate forms part of the family assets that will be divided. That son-in-law you weren’t so fond of just walked away with a big chunk of your hard earned wealth. A Trust will have ensured your wealth stayed in your family regardless of marriages and partnerships.
You die leaving your estate to your 2 adult children to be equally divided. You know that one of your children has an addiction. They will spend their inheritance any way they wish. You could have setup a TestamentaryTrust to provide your addicted child with ongoing support such as accommodation and living expenses but not to receive any money until they overcome their addiction.
You and your wife are facing bankruptcy due to a failed business – then you die. In your Will your wife is your sole beneficiary. The proceeds of your Will must first be allocated to creditors, taxes and other costs. There is nothing left for your wife to inherit once the creditors have been paid. You could have protected your assets long before your business started to fail . A Testamentary Trust can be set up to insulate beneficiaries against bankruptcy – provided it is setup before there are any financial problems and not used as a way to avoid paying debts.
You have divorced your previous spouse with whom you share two children. Your new partner has three of their own children from a previous relationship. You die and as per your Will your current partner of 3years inherits your estate. They promised to distribute it fairly amongst all children but this was not included in the Will. Your divorced spouse is contesting your Will on behalf of your own children. Your partner agrees to settle this out of court to avoid legal expenses. However, your divorced spouse is going for a greater share of your estate than what is being offered by your recent partner. This legal battle erodes your estate over the course of one year by $100K. Money which could have been distributed amongst the 5 children at $20K each tax free for the first year had you taken an extra step in your Will to provide for this blended family through a Testamentary Trust.
You have no close family, no living spouse but you have a dog which is clearly going to outlive you given your recent diagnosis. You cannot nominate your dog as a beneficiary of your estate but you can setup a Pet Trust to ensure it has proper ongoing care and the funds will be managed and distributed by your Trustee as per your written wishes. You may have pre-arranged for your pets carer to live in your home for the duration of the pets life. When your pet dies, you may wish to bequeath the residual estate to an Animal Charity. As always, the variables are numerous and it’s worth consulting someone qualified for the best outcome for your pet and your estate. https://www.lawsociety.com.au/sites/default/files/2018-04/PETS%20&%20WILLS.pdf
You have a disabled child .You have no close family members who are willing or even qualified to care for your disabled child who has very specific needs. How can you ensure your child will be cared for throughout the rest of their life? Leaving an inheritance to a disabled child or other siblings to take care of the disabled child does not give any guarantees this care will continue throughout their entire life. A Testamentary Trust can be setup with specific instructions of how the estate is managed, who manages it, what the Trustee has power over, what level of care your child must receive, what to do when your child becomes an adult, what to do with the estate when your child dies and much more.
Qualified Estate Planners know how to manage your assets in many scenarios. Sometimes a regular Will can be tailored to cover scenarios and sometimes it has limitations.
When to form a Testamentary Trust
Some circumstances where it might be useful:
Divorce / New Partner
Blended or extended family
Children from other relationships
Future family – provides for future generations
Beneficiaries unable to manage money: minors, disability, addictions
Tax benefits – tax free thresholds for minors
The Trust funds can be an investment with only the interest being distributed
Large or complex estates might benefit from a Testamentary Trust
Testamentary Trusts can continue to distribute wealth for 80yrs* to generations
*this term can vary in different States and Countries
How is it executed?
The nominated Executor of the Will carries out the instructions of the Will.
When there is a Testamentary Trust as part of the Will, the Trust is setup and a Trustee is nominated to manage it.
Sometimes the Primary Beneficiary can nominate the Trustee, including themselves
In the case of a Protective Trust, the Executor of the Will nominates the Trustee.
Types of Testamentary Trust
Here are some variations of these Trusts:
Special Disability Trust
Superannuation Proceeds Trust
Some are setup to protect the estate and others are setup to protect beneficiaries.
A Testamentary Trust has some added Tax Benefits. This is definitely out of the scope of this post as it depends on the age and incomes of the beneficiaries and can be setup to gain maximum advantage from the estates capital for up to 80years.
The main message for you to take away here is that so much of your estate can be eroded by tax if the distribution of funds is not setup in line with tax advantages and monitored by Tax Professionals periodically as Tax Laws change and beneficiaries circumstances change.
Cost of Testamemtary Trust
In Australia, it can cost between $2000 – $5,000 to setup a Testamentary Trust. Annual Taxes on the Trust $2500 – $5000. If Tax Laws change then an appointment with the Lawyer is necessary to review the Trust. In the bigger scheme of things, some greater benefits which protect beneficiaries from Bankruptcy Proofing, Divorce Proofing, Family Law and the Tax benefits make a Trust worthwhile.
There is a certain amount of advice that is free. But remember, there is no Free Will. Everything has a cost and that cost may not take affect until your death. It is a good idea to request a list of up front charges and ongoing charges – they should be clear and not vague.
The Estate Planning Team
When searching for someone to assist with your Estate Planning, do your homework, ask around for referrals from people who have been through this. Choose an Estate Planner with a long standing good reputation. Once you know what your Estate entails, those are the areas you need expert advice. Look for a Lawyer, Legal Firm or Estate Planning Firm that have expertise in Law, Finance, Accounting, Tax Laws, Family Law, Superannuation, Property Law or whatever area relates to your estate. Pets are another area you might need expert advice for.
When not to use a Testamentary Trust
If you have a straight foward Will where your spouse and children are beneficiaries of your estate and your estate is <$200K and there are no concerns, a Testamentary Trust might be an overkill.
However, it may be worthwhile discussing your Estate with an Estate Planner in case they uncover a situation you have not considered.
The roles and responsibilities for a Testamentary Trust
⦁ Executor – Executes Will and can manage funeral if requested, probate, assets, debts, taxes, notifications, beneficiaries and sets up the Testamentary Trust
⦁ Appointor – Nominated in the Deed for the Testamentary Trust, an Appointor has power over the Trustee. They can appoint or remove Trustees and according to the Deed, the Trustee may need to seek approval to perform certain duties in relation to the estate. An Appointor should be a trusted Family member who is not a beneficiary. This role is not mandatory.
⦁ Trustee – the owner of the Trust. Manages the estate, distributes the estate to the beneficiaries. There can be multiple Trustees with joint control over the Trust.
⦁ Beneficiary – the person that receives the proceeds of a Trust, periodic payments or a one-off payment or both.
⦁ Benefactor/Testator/Trustor – in the context of Testamentary Trusts refer to the deceased who has left the Will
A Testamentary Trust can have a life of 80yrs+ so the above roles should have provison for successors.
Roles can be mixed
The Executor can be The Appointor, The Trustee and/or a Beneficiary.
The Appointor can be The Trustee.
The Trustee can be a Beneficiary.
Testamentary Trusts are a specialised topic. I have only given you an overview. I hope you find this topic beneficial.
This website will be covering more topics such as:
Life & Funeral insurance, Care of your Pets, Organ Donation, Funeral details, choosing Caskets or making your own,choosing Burial Plots or spreading Ashes, telling your story before you die, procedures to be Returned Home for burial overseas and so much more.
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