What are the benefits of a testamentary trust?
There are many reasons why you should consider creating a testamentary trust. In this article, we’ll explore 3 benefits of a testamentary trust.
A testamentary trust gives you some control over how your estate’s assets will be used by your beneficiaries. This control can last generations, as a trust may last for up to 80 years. The classic example is gifting an asset to your beneficiary subject to them acquiring a certain age. In this instance, you can ensure your beneficiary will utilize the asset when they have the maturity and financial literacy to do so. Until the beneficiary obtains the stipulated age, the trustee looks after the trust property.
Another example of maintaining control over your trust assets would be imposing conditions on how the trust property is to be used by the beneficiaries. Grandparents may leave funds in trust for the specific use of their grandchildren’s tuition fees, or parents may specify that funds or income derived from the trust property is to be used for the care and maintenance of a disabled child, to ensure the child has a stable income after the parent’s death
A testamentary trust can protect the gift from harm. As the trust property is not owned outright by the beneficiary, any harm experienced by the beneficiary will not affect the gift. For example, situations involving bankruptcy, divorce, gambling or drug addictions will not harm the gift.
A testamentary trust can protect the trust property from third-party claims or creditors seeking compensation from a bankrupt or ‘high-risk’ (such as working in a profession where negligence claims are prevalent) beneficiary.
Situations like this encourage the creation of a second chance testamentary trust, which essentially splits the trust in two portions. Half the trust may be gifted to the beneficiary in their youth, e.g. 25 years old. The rest of the trust may be gifted years later, e.g. 40 years old. This ensures the beneficiary has the opportunity to ‘start again’ should they have been declared bankrupt or otherwise lost the first half of the trust fund. We recommend seeking legal guidance if you wish to consider a second chance testamentary trust.
Additionally, assets held in trust can be protected from divorce settlement proceedings, ensuring the divorced spouse of your beneficiary will not be able to claim ownership over the trust property.
Tax benefits are a popular reason for people creating testamentary trusts.
The structure of a testamentary trust provides the opportunity for the trustee to manage the trust property in a more tax efficient manner. Income or taxable gains from the trust property are not immediately held by the beneficiaries but are instead distributed amongst the beneficiaries at the trustees’ discretion. This means the trustee has the opportunity to consider tax thresholds of the beneficiaries, ensuring the trust property is evenly and efficiently spread.
Additionally, Capital Gains Tax is not usually required when a trustee passes trust property onto a beneficiary.
What is a testamentary trust?
Your will grants gifts to the nominated beneficiary (or beneficiaries) upon your death. Attaching conditions or rules to these gifts can create a ‘testamentary trust’, which means that the beneficiary does not own the gift outright upon your death, but rather can be entitled to the gift at the trustees’ discretion (the person who holds the gift on behalf of the beneficiaries).
Related: What is a testamentary trust?
Elements of a testamentary trust
- There is a valid will;
- Assets are identified to be held on trust. This is known as the trust property;
- A trustee is nominated, and granted control over the trust property;
- Beneficiaries of the trust property have been nominated, and the trustee is tasked with managing the trust property and any income it may generate for these beneficiaries.
If you wish to discuss whether a testamentary trust is an option for your estate, please do not hesitate to contact us.