Thinking | 24 September 2015

Testamentary trusts

What are they?

Many people use testamentary trusts as part of their succession planning. A testamentary trust is a discretionary trust established under a Will. The testamentary trust does not come into operation until your death.

Instead of assets passing directly to an individual, they pass to the trustee of the testamentary trust.

Who are the beneficiaries of the testamentary trust?

The main beneficiary of the trust is called the ‘primary beneficiary’. The trust also has general beneficiaries. The general beneficiaries usually include relatives of the primary beneficiary (including parents, spouses, siblings, children, grandchildren, aunts and uncles), as well as companies and trusts that the primary beneficiary has an interest in, and charities. The trustee can distribute funds to any primary or general beneficiaries at the trustee’s discretion.

If the main beneficiary of the trust is an adult, they are often appointed as the trustee and the appointor. If the main beneficiary is a child or someone who needs assistance in controlling their financial circumstances due to vulnerability or disability, then a relative, close family friend or trusted advisor can be appointed to act as trustee and appointor of the trust.

Optional testamentary trusts

Testamentary trusts can also be optional, allowing the residuary estate to pass directly to a person or through to a testamentary trust. This gives flexibility and means the executor can decide the best course of action at the time.

Who decides how the trust funds are administered?

The trustee of the testamentary trust decides how the trust funds are invested and distributed. The appointer of the trust has the power to remove and appoint the trustee. The trust can last for up to 80 years, however, it can be ‘wound up’ at an earlier time if needed.

What are the beneficiaries of the testamentary trust?

Testamentary trusts provide many benefits including:

  • asset protection from creditors
  • some protection in family law disputes and
  • tax planning opportunities.
No testamentary trust
Income distributed  ($60,000) Tax payable
Adult $60,000 $28,200
Testamentary trust
Beneficiary Income distributed ($60,000) Tax payable
Child 1 $20,000 $0
Child 2 $20,000 $0
Child 3 $20,000 $0
Total $60,000 $0
Tax saving per year= $28,200

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