What is a Testamentary Trust?
It is a trust established under a will, but it does not come into effect until after the death of the person making the will.
Is a testamentary trust different from a family trust?
Yes. Although both testamentary and family trusts have similar features, such as the ability of the trustee to decide which beneficiaries of the trust will receive income, there are considerable taxation advantages for infant beneficiaries (those under the age of 18 years) under a testamentary trust.
Income received by infant beneficiaries from a family trust will be subject to penalty tax rates should that income exceed $641.00. Under a testamentary trust, infant beneficiaries receive the full tax income threshold of $6,000 tax-free, with income above that amount being taxed at normal adult rates. Because of the uncertainty as to whether the Federal Government will tax trusts in the future, it is advisable that testamentary trusts be incorporated in a will as an option that can be triggered as circumstances dictate. Even if testamentary trusts are taxed at some future date, there may still be significant tax or other advantages to your beneficiaries if you include a testamentary trust as an option.
If you have a beneficiary who has an intellectual impairment, you could leave part of your estate for that person’s benefit by naming that person as the primary beneficiary (but not a trustee) of a testamentary trust. This will prevent unscrupulous persons from taking advantage of the beneficiary and protect his or her share of your estate. Either a family member, professional adviser or a trustee company could be named as the trustee of this type of testamentary trust.
Who can be trustee of a testamentary trust?
Anyone you wish, including the executors of your will, your spouse or partner, or your children. The trustee has effective control of the trust, so the trustee should be a person who you know, and whom you trust to act in the best interests of those who are to receive the main benefit of either the whole or that part of your estate that will be left subject to the testamentary trust. It is possible to establish a number of testamentary trusts under a will and name different trustees for each of them.
What is difference between the settlor and the appointor?
A settlor is the person who starts the trust. Typically, the settlor signs the trust deed and gives the trustee a nominal sum (for example, $10). The $10 merely starts the trust. Later the appointor can instruct the trustee to accept other assets into the trust. The settlor should not be a family member because the settlor cannot benefit under the trust. Your accountant or financial planner are the most common settlors.
The appointor is the person who appoints or removes trustees. This is an important office because the appointor (sometimes called guardian) controls the trustee and therefore controls the family trust. The appointor can remove and appoint the trustee whenever they desire. The same person can be both the appointor and the trustee. You can appoint yourself, or yourself and your spouse, as the appointor.
If I left my estate to a testamentary trust and my spouse needed the money, would my spouse be able to gain access to it?
Providing your spouse is a beneficiary of the testamentary trust, the trustee could pay all or part of the capital and/or income to your spouse, or to any other named beneficiary of the trust.
Are there any other advantages of a testamentary trust apart from taxation?
Yes. There are several. A testamentary trust could also protect beneficiaries from creditors, or litigants in professional negligence claims and can also protect spendthrift or intellectually impaired beneficiaries.
What should I consider before establishing a testamentary trust under my will?
There will be ongoing administrative costs involved in maintaining a trust, such as accountancy fees for preparation of trust taxation returns. Factors that you should take into account, include a consideration of whether the income generated by your estate would be sufficient to warrant a testamentary trust, or whether there are special needs such as a beneficiary with an intellectual impairment. If, for example, all your assets are owned jointly with another person or by a family trust, there may be insufficient assets in your estate to make the establishment of a testamentary trust worthwhile.
If you are uncertain about whether you will have sufficient assets in your estate, a testamentary trust can simply be included as an option in your will, with the trustee(s) making the decision whether or not to implement the trust at the relevant time.
What if I already have a family trust?
The assets of your family trust will not form part of your estate. If all assets are presently owned by your family trust, there would be no point in establishing a testamentary trust unless you planned to wind down your family trust and transfer the assets in it to yourself.
Is it possible to set up a similar trust after my death if I don’t change my will now?
Yes, but there are limitations. The post-death trust beneficiaries are limited to those who would have received a share in your estate under the intestacy legislation (the law that applies where you do not make a will). In addition, the capital of the trust would eventually have to be paid to those beneficiaries in the proportions to which they would be entitled under intestacy. With a testamentary trust, the capital of the trust can be paid to whomsoever the trustee decides among the beneficiaries.
What advice should I obtain before deciding to establish a testamentary trust?
You should consult your accountant, solicitor and/or financial adviser, to ensure that you are aware of all the advantages and disadvantages (some of which will undoubtedly depend on your own particular circumstances, both financial and family), before you make your decision.
Alternatively, a testamentary trust can simply be included as an option in your will to cater for future changes in your circumstances or those of your beneficiaries.