A Testamentary Trust is a trust created under a Will, which comes into effect only after the death of the person making the Will (the Testator). Essentially, upon the death of the Testator, their assets belong to the Trust, rather than going directly to any beneficiary of the Will.
By choosing independent trustees for your Testamentary Trust (who are not beneficiaries of your estate), the assets of the Trust are generally considered not to form part of the assets of the beneficiary, as they do not have the power to control the distribution of the assets of the Trust. It is this legal distinction which helps prevent creditors and other claimants from accessing the assets in the Trust.
In this way, the beneficiaries are able to take advantage of increased asset protection against creditors and other claimants, as well as maximum flexibility in distributing the income and capital generated by the assets in the Trust with the benefits discussed below.
An important benefit of the Testamentary Trust is greater asset protection against third parties, including creditors, divorcing or separating spouses and even other potential beneficiaries. This is particularly important if a beneficiary is involved in a higher risk profession (such as a business owner), or if a beneficiary is involved in a property settlement with their ex-spouse.
For example, if a beneficiary owes money to creditors and then receives assets from a deceased’s estate under a simple will, the beneficiary’s creditors would be able to access those assets to pay off the beneficiary’s debts. However, if the assets are left to the beneficiary via a Testamentary Trust and the beneficiary does not have sole control over the Trust, creditors are generally unable to access the distribution as the assets are ‘owned’ by the Testamentary Trust, not the beneficiary.
In the case of spousal separation and property settlements, Testamentary Trusts can generally be used to provide some protection against claims by the ex-spouse on those assets in the Trust, provided the beneficiary does not have the sole control over the Trust.
Testamentary trusts allow trustees to distribute and split the income and capital gains of a Trust in a way that minimises tax on the beneficiaries.
Significantly, unlike non-Testamentary Trusts distributions from a Testamentary Trust to children under 18 will be eligible for the full income tax-free threshold, with income above that being taxed at normal adult rates. This means approximately $18,000 can be distributed to each child beneficiary free of tax each year. A family with several children or grandchildren could benefit significantly by distributing the income of the Trust between the children under 18.
Want to know more? Talk to us!
Estate planning is vital to ensure the smooth transition of your assets to your beneficiary, and to protect your loved ones after you pass away. For peace of mind, contact KHQ’s Private Wealth group for a confidential, obligation free discussion.