The concept of trusts emerged in 1535 when King Henry VIII forced the Statute of Uses through the English Parliament. Recently, they have become an attractive structure for both individuals and businesses. There are numerous types of trust. If you need information about testamentary trusts, this article details what they are, how to make one and their advantages.

What is a Trust?

A trust is a relationship.  It is an arrangement whereby a settlor transfers the legal and equitable title of the property to a trustee. The trustee must then administer that property on the behalf of, and for the benefit of, one or more third parties. These are called the beneficiaries of the trust or the cestui que trust. Trusts can be either private or public. A court can also impose a trust in certain circumstances.

What is a Testamentary Trust?

A testamentary trust is a private trust. Often, these kinds of trusts can be for a charitable purpose. Testamentary trusts can also benefit specific beneficiaries. Testamentary trusts are formed in the same ways as other trusts. The testator appoints a testamentary trustee in their will who must hold individual, defined property for the benefit of third parties. The testamentary trustee has the same fiduciary obligations and is required to maintain the same strict standards as other trustees.

An individual creates a testamentary trust in a will or a codicil to a will. A will is a written document that reflects the last wishes of a person concerning the disposition of their property. A codicil is a document that supplements an earlier will. It adds to, alters, confirms or revokes a will or a part of a will. A testamentary trust is unique because it is not Inter Vivos meaning that there was no transfer of property between living people.

Why Make a Testamentary Trust?

A testamentary trust can be a good idea if a testator wishes to safeguard assets or distribute them in a flexible and tax effective manner.  

Perhaps the most important reason that testators make these kinds of trusts is to protect their property from dissipation. The beneficiaries of the trust do not hold title to the assets of the trust. The most they hold is the right to be considered by the testamentary trustee.

As such, in situations of financial difficulty or family breakdown, the assets remain untouched.  For example, if a beneficiary’s marriage or partnership breaks down, the trust assets cannot be included in a property settlement. The beneficiary does not own the property. It, therefore, cannot be counted in any division of assets. 

Similarly, if a beneficiary has difficulties with creditors or becomes bankrupt, the trust assets also remain separate.  These trusts are also an excellent idea if the beneficiaries are young. As the testamentary trustee distributes trust capital and income, the potential for waste and dissipation of the trust through inexperience falls.  

These trusts are flexible in so far as a testamentary trustee has discretion. They can distribute assets or income of the trust to a specified beneficiary at a time they perceive advantageous and to an extent or degree that they feel is best.

These kinds of trusts are also tax effective because they permit income splitting among beneficiaries. If one beneficiary has a high income and another a lower one, the trustee may decide to apportion more income from the trust to the latter. That minimises income tax paid on the trust income. Of course, a trust can never be used to avoid tax obligations. It is merely a good way of minimising them.

 

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If you need advice about making a testamentary trust, speak with a lawyer experienced in trusts. Contact LegalVision’s qualified lawyers to assist you. Questions? Call us on 1300 544 755.

Carole Hemingway

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