Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central Legal recommends you seek professional advice before taking any action based on the content of this Bulletin.
by John Wojtowicz (Director - Law Central Legal)
Testamentary trusts have become, over the last 20 years, ever more popular as a structure used for estate planning purposes. This increase in popularity largely revolves around the asset protection and tax benefits associated with these trusts.
In this series of newsletters we highlight some of the issues associated with the use of testamentary trusts in estate planning. Part one of this series focuses on the basics of testamentary trusts whilst future newsletters will address some of the more complex issues faced by practitioners and persons contemplating the use of these trusts.
What is a testamentary trust?
A testamentary trust is a trust established under a Will. It usually contains provisions similar to a discretionary trust allowing the trustee of that trust to distribute income and capital to a broad range of beneficiaries.
The testamentary trust only comes into existence once the Will maker has died.
It is possible for a Will to contain more than one testamentary trust (i.e. separate trusts for each child of the Will maker).
Advantages of a testamentary trust
income received by a child beneficiary will be taxed at adult rates - section 102AG(2)(d)(i) ITAA 1936 (note: contributing property to a testamentary trust, post its establishment, that derives income may result in the minor not receiving the tax concessions in relation to that income see s 102AG(3) and s 102AG(4) ) Adding additional property or capital to a testamentary trust, post its establishment will be discussed in a future newsletter;
Flexibility of distributing income and capital of the testamentary trust.
Asset Protection: similar protection afforded to discretionary trusts.
Protecting such part of the estate that is placed into the testamentary trust from wastrel beneficiaries or beneficiaries with substance abuse issues.
Disadvantages of a testamentary trust
Control of the assets in the testamentary trust is in the hands of the trustee who may make decisions that are not in line with the beneficiaries or the Will maker’s expectations.
Added degree of complexity to the estate resulting in additional administration costs – for example tax returns and accounts
Parties to a testamentary trust
Trustee: person or entity controlling the trust. Has powers (subject to the trust terms) to decide what investments the trust should have as well as determining what income and capital distributions are made to which beneficiaries.
Settlor: unlike a discretionary trust, there is no settlor involved as the bequest made in the Will by the Will maker constitutes the settlement.
Beneficiaries: the beneficiaries will normally include family members, related entities of the Will maker and charities. The beneficiaries do not have any proprietary right in the assets of the trust, only a right to ensure that they are considered and that the trust is administered properly.
Appointor: not an essential requirement to have such a position in the testamentary trust. Usually put in place to allow a mechanism for removing the trustee. The appointor usually has the power to replace the trustee of the testamentary trust and appoint a new one.
The position of the appointer in a testamentary trust, as with a discretionary trust, raises some important issues regarding how their rights and powers are dealt with in the terms of the trust. Platinum and Gold members read on to see commentary on this issue.
Guardian/Controller (optional): the person holding this position normally has a power of veto to block certain decisions of the trustee, for example amending the terms of the trust, capital advancements etc. Some testamentary trust precedents give this power to the Primary Beneficiary or the appointor without the need of having a guardian/controller appointed under the deed.
Ensure that the testamentary trust terms are properly drafted at the Will drafting stage. Amending (if possible) the testamentary trust once it comes into existence can be problematic. The issues around amending a testamentary trust will be discussed in a future newsletter.
Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central recommends you seek professional advice before taking any action based on the content of this Bulletin