A testamentary trust is a trust created by your Will that comes into effect after your death. Instead of an inheritance passing directly to a beneficiary, some or all of their inheritance can be held in a trust and managed in accordance with the terms of your Will.
A testamentary trust can provide greater flexibility in how an inheritance is managed and distributed. Depending on the circumstances, it may also provide asset protection or taxation benefits and can be particularly useful where a beneficiary is young, vulnerable or may need assistance managing their inheritance.
Not everyone needs a testamentary trust. Whether one is appropriate will depend on your family, your assets, the circumstances of your beneficiaries and what you want your estate plan to achieve.
Questions about a Testamentary Trust
How does a testamentary trust work?
A testamentary trust is created under your Will and comes into effect after your death. Instead of an inheritance passing directly to a beneficiary, the inheritance is held in the trust.
The person who controls and manages the trust is the Trustee. The people who may benefit from the trust are the beneficiaries. A testamentary trust can have a number of potential beneficiaries, and the Trustee decides how and when income or capital from the trust is distributed between them.
A Trustee can also be a beneficiary of the trust. How the trust is structured and who has control of it can be important, particularly where asset protection is one of the reasons for including a testamentary trust in your Will.
Who can benefit from a testamentary trust?
A testamentary trust can be structured to benefit a number of people, depending on the terms included in your Will.
For example, a trust established for a child may also allow their children (your grandchildren), to benefit. This can provide flexibility for the Trustee to distribute income or capital between beneficiaries according to their circumstances.
A testamentary trust may also be useful where a beneficiary is young, vulnerable or may need assistance managing an inheritance.
Who controls a testamentary trust?
The Trustee controls and manages the testamentary trust. This includes managing the trust assets and deciding how and when income or capital is distributed between the beneficiaries.
A Trustee can also be a beneficiary of the trust. However, where a beneficiary also controls the trust, the trust assets can “look and feel” more like that person’s own assets because they have control over how the trust is managed and who benefits.
Who you appoint to control the trust therefore requires careful consideration, particularly where protecting a beneficiary’s inheritance is one of your estate planning objectives.
What are the potential benefits of a testamentary trust?
A testamentary trust can provide greater flexibility in how an inheritance is managed and distributed.
Depending on your circumstances and how the trust is structured, a testamentary trust may also provide:
- greater protection for an inheritance;
- taxation benefits for beneficiaries; and
- greater flexibility in deciding how and when income and capital are distributed between beneficiaries.
The potential benefits will depend on the circumstances of the beneficiaries and how the testamentary trust is structured. A testamentary trust is not necessary or appropriate for everyone.
Can a testamentary trust provide asset protection?
A testamentary trust may provide greater protection for an inheritance because the assets are held in the trust rather than passing directly to the beneficiary.
The level of protection will depend on how the trust is structured and, importantly, who controls it. Where a beneficiary has control of the trust, the trust assets can “look and feel” more like that person’s own assets.
If asset protection is an important part of your estate planning, careful consideration should therefore be given to who will control the trust and how it will operate.
Are there tax benefits from a testamentary trust?
A testamentary trust may provide taxation benefits for beneficiaries in some circumstances.
One potential benefit is the way income distributed from a testamentary trust to children under 18 may be taxed. This can provide greater flexibility in distributing income between beneficiaries and may result in tax savings for the family.
The taxation benefits will depend on the circumstances of the beneficiaries and how the trust operates. A testamentary trust should not be included in a Will solely on the assumption that it will provide a tax benefit.
Can I decide how and when a beneficiary receives their inheritance?
Yes. A testamentary trust can provide flexibility in how an inheritance is managed and distributed rather than requiring the inheritance to pass directly to a beneficiary.
The terms of the trust can set out how the trust is to operate and who may benefit from it. The Trustee can then manage the trust assets and decide how and when income or capital is distributed to beneficiaries in accordance with those terms.
This can be particularly useful where a beneficiary is young, vulnerable or may benefit from assistance managing their inheritance.
Can a testamentary trust be changed or ended?
While you are alive and have capacity, you can change the terms of a testamentary trust by changing your Will.
Once you have died and the testamentary trust has been established, changing or ending the trust can be more complicated. The terms of the trust may provide some flexibility for the Trustee to make changes or bring the trust to an end.
In some circumstances, changes may require the agreement of the beneficiaries or an application to the Court.
How we can help
Whether to include a testamentary trust in your Will depends on your family, your assets, the circumstances of your beneficiaries and what you want your estate plan to achieve.
We can help you consider whether a testamentary trust is appropriate for your circumstances and, if it is, how it should be structured. This includes considering who should control the trust, who may benefit from it and how you would like an inheritance to be managed and distributed.
If you already have a Will containing a testamentary trust, we can review the provisions with you and discuss whether they continue to reflect your wishes and circumstances.