Succession and estate planning should consider strategies, where relevant, to protect wealth, safeguard assets, minimise loss or liability, and assist with the future transfer of business and other interests. Having worked hard to accumulate wealth, most people want to ensure that their assets are available for future generations. If you have acquired reasonable assets, have a blended family, or at-risk beneficiaries, having a testamentary trust in your Will may be worthwhile.

What is a testamentary trust?

A testamentary trust is a discretionary trust contained in a Will that comes into effect when the testator (will maker) dies. The trustee is appointed to manage the trust and can make decisions about who, from those identified as beneficiaries, will receive gifts from the capital or income of the trust in accordance with the rules outlined in the trust. If a person wants to leave gifts to young children, or otherwise vulnerable individuals, a testamentary trust can assist by ensuring that funds are used to benefit those individuals, due to the duties of a trustee.

While there are ongoing costs involved with a testamentary trust, meaning they may not be appropriate for everyone, they provide a level of protection for assets or beneficiaries in a number of ways.

Benefits of testamentary trusts

The effect of a trust is the separation of the beneficial, from the legal ownership of property. Holding assets in trust can help protect them from claims by third party creditors that could arise in events such as bankruptcy, insolvency, family law or other court proceedings.

A key benefit of a testamentary trust is that it allows an individual who has acquired wealth to exercise a greater degree of control over how that wealth is distributed to beneficiaries, not just immediately after death but potentially for many future generations. Testamentary trusts may also assist with tax planning, which we recommend you discuss with your accountant.

Testamentary trusts may be suitable for high-wealth individuals, blended families, or where a testator has concerns that a first-generation beneficiary such as a spouse or child may dissipate the asset base leaving little if anything of the testator’s legacy and wealth to be passed on to future generations.

Trusts are complex structures and require effective management to achieve the anticipated outcomes, so we recommend seeking legal advice if you are considering having a testamentary trust in your Will. You will need to ensure that the trust is properly structured, and the desired benefits outweigh the costs of administration.

As the trustee will have a key role in the ongoing control of your estate assets, care must be taken in appointing an appropriate person or entity. Although it is common to appoint the executor or a major beneficiary, this may not be in your best interests. A discussion with your lawyer setting out your family circumstances and objectives will assist in making the right choice.

If you need assistance, contact one of our lawyers at [email protected] or call 02 4297 6066 for expert legal advice.