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“Testamentary” is a legal term related to making a will.
A “trust” is where one person holds the legal title of property for the benefit of another person (not themselves).
A “trustee” is the person who takes the ownership in “trust” for another person (known as the “beneficiary”).
A testamentary trust can be established under a will to appoint a trustee to use property for the benefit of the beneficiary in the way that the will specifies.
- What it can achieve
- Discretion of Trustees
- Choosing a Trustee
- Private Trustee Companies
- Individual Trustee
- Is a Testamentary Trust for you?
Let’s take the example of a couple with a child who has an intellectual disability. They naturally worry what will happen to the child after their death. One of the ways to deal with the child’s financial security is to set up a testamentary trust. In this way the testator (the person making the will) can direct how the assets will be used after their death.
Under the trust, the trustee can either be given specific instructions on how the money will be spent, or they can be given a discretion.
The advantages of allowing for a discretion are:
- It is the most flexible type of the trust;
- It may provide the best chance of the beneficiaries’ actual future needs being met; and
- It may best allow for the best interests of the beneficiary to be met.
This is a significant decision and should not be made without serious thought. The person you choose will have a lot of responsibility, and should have some financial management skills (or access to those skills).
You could choose:
- A private trustee company; or
- An individual.
Private trustee companies are regulated by law. The advantages of using these companies are:
- They are professional;
- They are independent; and
- They are companies and therefore, unlike an individual trustee, can continue to act as trustee into the future.
The disadvantages are:
- The trustee will not have a personal relationship with the beneficiary; and
- The company will usually charge.
The main advantages of an individual trustee are:
- You can appoint someone with a personal relationship with the beneficiary; and
- It may be cheaper.
The main disadvantages are:
- The individual may not have sufficient expertise; and
- There can be a conflict of interest with the best interests of the beneficiary, especially if the trustee is a residuary beneficiary under the will.
A Testamentary Trust is simply a trust created within a Will which comes into effect upon the death of the Will maker. Factors that you should consider in assessing your suitability for a Testamentary Trust include:
Taxation Advantages. Considerable taxation advantages are available for infant beneficiaries (those under the age of 18 years). Under such an arrangement infant beneficiaries are entitled to receive the full tax income threshold of $18,000.00 and the adult marginal tax rates. Under an ordinary Family Trust infant beneficiaries would be taxed at the highest marginal tax rate.
Intellectually Impaired Beneficiaries. Will makers are often concerned about protecting the share of their estate left to an intellectually impaired beneficiary e.g. suffering from schizophrenia. The vulnerability raises concerns and a Testamentary Trust would ensure that the beneficiary is adequately cared for after the death of the Will maker.
Asset Protection. Trusts have long been used as an asset protection mechanism. A Testamentary Trust is suitable for Will makers who may feel reluctant to leave assets to a particular child due to a fear that their relationship with their spouse or de facto may later result in a subsequent claim if the assets were left directly to the child. Testamentary Trusts may also offer protection against potential creditors and bankruptcy.
Your Will is one of the most important documents that you will sign during your lifetime. At Quinns our combined legal and accounting knowledge enables us to assess your individual needs and ensure that your Will is drafted in a tax effective manner and in the best way to protect your assets even after your lifetime.
Our dedicated team can assist you with any queries or concerns you may have about your Will or a Estate Planning matter. Complete and submit the express enquiry form or call us on +61 2 9223 9166 to arrange an appointment.
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The Quinn Group operates Quinn Consultants, Quinn Lawyers, Quinn Financial Planning and Quinn Financial Solutions. The Quinn Group provides related information in regard to legal, accounting and financial planning issues. Liability limited by a scheme approved under Professional Standards Legislation* *other than for the acts or omissions of financial services licensees.