What is a testamentary trust?

A testamentary trust or “will trust” is created, as the name suggests, through a will. Unlike a trust created by a Deed of Settlement signed during lifetime, the will trust does not come into effect until death.

Why should I consider using a testamentary or will trust?

Provided Age Pension Planning is irrelevant and the income earning assets of a couple are substantial, there can be significant tax and other advantages for a surviving spouse and family when this form of trust is in place.

How does it work?

• Upon the death of a spouse, the earning assets of the deceased pass to the will trust.
• The surviving spouse will normally be the sole trustee and sole appointor of the trust, meaning that they have absolute control of it.
• In this capacity, the surviving spouse has the power to distribute income earned from the trust to he or she or to any beneficiary. Beneficiaries may include children and their spouses, grandchildren and great grandchildren and their spouses.
• When the surviving spouse dies, if all children are to inherit assets equally they will become the trustees of that will trust and decide how best to use that trust in the future.
• The wills of each parent in turn would normally then provide that the surviving spouse’s assets pass to separate trusts, one for each child. Depending on the ages of the children and subject to how long you seek to defer the children from having complete control, the trustees and appointors could be other senior family members, friends or advisors until each child turns say 30-35 or whatever you choose.

What are the advantages?

• There is a tax advantage where income is distributed to beneficiaries below the age of eighteen. The beneficiary in question will be entitled to the adult tax-free threshold of $6000 compared to the tax-free threshold of $643 if income were distributed from a normal family trust.
• There is a deferral of the capital gains clock where assets are held within the trust until the death of the primary beneficiary.
• A child can take capital distributions from the trust at any time with the consent of the trustees or have distributions made to another family member.
• No child will be disadvantaged by taking an inheritance through a trust because the child may either exercise a right given by the will to take the inheritance personally, rather than through the trust, or the trust can be fairly easily dismantled at any time.
• Flexibility in distributing income, taking into account the tax position of each family member. In particular, the Testamentary or Will Trust can be of great advantage where there is a family member:
  • In a bad relationship
  • Inclined towards gambling
  • Under the influence of drugs or alcohol
  • At the risk of being declared bankrupt

• While the assets are held in the respective will trust, they are not assets of the child and can remain in that state to protect them against a threat of bankruptcy. If that situation ever arose, it would be essential to have at least one additional person appointed as a trustee along with the particular child to avoid a trustee in bankruptcy stepping into the shoes of the person.
• Many grandparents are taking the opportunity of setting up a will trust with the specific intention of assisting in the education of their grandchildren. This is achieved by money being allocated directly to grandchildren for their education purposes rather than it being processed through the parent at normal tax rates.
• A trust that is well constructed can provide protection against will challenge, particularly in relation to farming land.
• A trust when compared to a company is relatively private and cheaper to administer.

If you require advice or further information in relation to any of the matters discussed in this article, please contact our Wills, Estates & Succession Planning team on 03 5273 5211.