What is a Testamentary Trust?

A testamentary trust is a trust established under a person’s Will. The assets that form part of that trust are from the estate of a deceased person. Instead of leaving inheritance directly to a beneficiary, a Will can direct that, in some cases, the inheritance is to be distributed to the trustee of a testamentary trust. The beneficiaries of the trust are the intended beneficiary (who is often the primary beneficiary of that trust) and that beneficiary’s family members (such as their children). The terms of a testamentary trust can be restrictive or flexible, subject to the testator’s intentions and whether the intended beneficiary has any vulnerabilities. 

There are two main advantages of the testamentary trust and reasons why they are a common structure utilised during the estate planning process.  

The first main advantage is the tax-planning benefits and the potential to save significant amounts of tax for a primary beneficiary’s family. The income earned from the assets held in the trust can be distributed to one or more of the beneficiaries or potential beneficiaries in a tax-effective manner (for example, to those on the lowest income). The trustee has the discretionary power to allocate income and capital as the trustee sees fit between beneficiaries, which can result in considerable and continuing annual tax savings for the primary beneficiary in managing their inheritance following the death of the testator. Further, distributions to minor beneficiaries are usually taxed at normal rates, which is not usually the case for distributions to minors from other types of trusts.  

The second main advantage is a level of asset protection. As the assets are not held in the personal name of the primary beneficiary, having the assets held in the trust offers a measure of asset protection against loss through divorce, bankruptcy or incapacity. The level of protection that can be achieved is subject to a number of factors, including the nature of the risk, the involvement of the primary beneficiary with the control of the trust and how the assets of the trust have been managed and distributed.  

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Disclaimer: This post contains information of a general nature only and is not intended to be used as advice in relation to a specific matter. Although every care has been taken in preparing the document, it may not be accurate or complete, particularly in the context of specific circumstances. MJM Lawyers disclaims responsibility for any errors or omissions.