What are testamentary trusts and the other types of trusts that may be useful for your estate planning?
There has been plenty of discussion about the benefits of a Testamentary Trust as one of the most powerful and flexible tools in Estate planning, but what you may not have heard about is the different variations of Trusts that you can create under the terms of your Will.
This article gives you a quick guide the main structures, their benefits, and what to consider before using them.
What Is a Testamentary Trust and When Does It Come Into Effect?
A Testamentary Trust is a trust created by a Will that comes into effect only on the death of the Will-maker. During the Will-maker’s lifetime, the trust has no legal effect and no assets as it is simply a set of instructions embedded in the Will. Upon death, the Estate assets are then transferred into the trust by the Executor, and the nominated trustee then administers those assets for the benefit of the named beneficiaries according to the trust’s terms.
Most testamentary trusts are discretionary, meaning the trustee has flexibility to decide which beneficiaries receive income and capital in any given year.
WHEN IS A DISCRETIONARY TESTATMENTARY TRUSTS A GOOD OPTIOn?
When the Estate is substantial and beneficiaries include minor children, or where income splitting and asset protection are priorities.
Benefits of a Discretionary Testamentary Trust:
- Income distributed from a testamentary trust to minor beneficiaries is taxed at ordinary marginal tax rates;
- Assets held in trust are not owned by the beneficiary personally, so they are generally protected from the beneficiary’s creditors and are not exposed to relationship property claims;
- The trust also has a maximum lifespan of 80 years in Victoria, so is helpful to pass down familial wealth.
Disadvantages of a Discretionary Testamentary Trust:
- More complex and costly to draft;
- The trustee must actively administer the trust by lodging tax returns, maintaining records, and making annual distribution decisions.
For further information about why a testamentary trust remains an effective estate planning vehicle in light of the recent Budget changes, read our article on the advantages of testamentary trusts.
WHAT IS A SPECIAL DISABILITY TRUST?
A Special Disability Trust is a formal trust structure established for a single principal beneficiary who has a severe disability. It can be created during the settlor’s lifetime or through a Will. The trust must comply with the model trust deed provisions under the Social Security Act 1991 (Cth) and is regulated by Services Australia and the Department of Social Services.
When is a special disability trust a good option?
Where a family member has a severe disability and the estate-planner wants to provide for their care and accommodation needs without affecting their Centrelink entitlements.
Benefits of a Special Disability Trust include:
- Assets up to a threshold (currently over $700,000) held in a qualifying SDT are exempt from the beneficiary’s Centrelink asset test, meaning the person with the disability can retain full Centrelink benefits while also receiving support from the trust;
- The Will-maker has peace of mind that their loved one with a disability will not be taken advantage of, as they will not have free access to their SDT, nor will any outsiders;
- Close family members can transfer assets into the SDT without those assets counting towards their own Centrelink assessment.
Disadvantages of a Special Disability Trust include:
- The trust can have only one beneficiary;
- It ceases when that person dies; and
- The funds must be used for the sole purpose of care and accommodation (with limited secondary purposes).
What Is a Protective Testamentary Trust?
A protective trust is a discretionary trust established for a vulnerable beneficiary, such as a person with mental illness, substance addiction, or poor financial management skills.
When is a PROTECTIVE TESTAMENTARY trust a good option?
A protective trust is a discretionary trust established for a vulnerable beneficiary, such as a person with mental illness, substance addiction, or poor financial management skills.
Benefits of a Protective Testamentary Trust include:
- The trustee (a trusted person or professional) controls the assets;
- The income and capital can only be spent for the benefit of the vulnerable beneficiary; and
- Secondary beneficiaries can be nominated to receive any remaining funds after the primary beneficiary’s death.
Disadvantages of a Protective Testamentary Trust include:
- The trust requires ongoing administration and trustee oversight.
HOW KPA LAWYERS CAN HELP?
Choosing between these structures depends entirely on your family circumstances, the size of your estate, and who you are providing for.
If you are considering a Testamentary Trust, a Special Disability Trust, or a Protective Trust, our Tills, Trusts, and Estates team can advise you on which structure is appropriate and prepare the relevant documentation to give effect to it.
If you’d like to learn more about any of the structures mentioned above, get in contact with one of our team.
