Testamentary Trusts in NSW

Testamentary Trusts in NSW

A testamentary trust is a trust established under a Will and generally comes into operation after the Will-maker dies. Instead of particular estate assets passing directly to a beneficiary, those assets may be held and managed by a trustee for the benefit of one or more beneficiaries in accordance with the terms of the Will.

Testamentary trusts can provide flexibility in estate planning and may be appropriate where a person wishes to provide additional protection or management of an inheritance for family members or other beneficiaries.

Why Consider a Testamentary Trust?

A testamentary trust may be considered for a number of reasons. Depending on the circumstances, it may assist with:

• managing an inheritance for children or younger beneficiaries;
• providing for vulnerable beneficiaries;
• managing inherited assets over a longer period;
• providing flexibility in the distribution of income and capital;
• certain taxation considerations; and
• providing a degree of separation between inherited assets and a beneficiary’s personal assets.

Whether these benefits are available will depend upon the structure of the trust, the assets involved and the circumstances of the beneficiaries.

Taxation of Testamentary Trusts

Special taxation rules can apply to income received by minor beneficiaries from property originating from a deceased estate or qualifying testamentary trust.

In certain circumstances, qualifying income may be treated differently from other trust income received by minors and may be taxed at ordinary individual rates rather than the special higher rates that ordinarily apply to minors.

The taxation treatment depends upon matters including the source of the trust assets and income, the terms of the trust and the circumstances of the beneficiaries. Appropriate taxation and accounting advice should therefore be obtained when considering the potential taxation consequences of a testamentary trust.

Tax laws applying to testamentary trusts can change, and taxation consequences should be reviewed with an appropriately qualified tax adviser before an estate plan is finalised.

Asset Protection Considerations

Holding inherited assets through a testamentary trust may provide a degree of separation between trust assets and a beneficiary’s personal assets.

This may be relevant where a beneficiary is exposed to commercial or financial risks, bankruptcy concerns, relationship breakdown or other circumstances affecting their personal assets.

However, a testamentary trust does not provide guaranteed protection. The treatment of trust assets will depend upon the structure of the trust and the particular legal and factual circumstances.

Providing for Children and Vulnerable Beneficiaries

A testamentary trust can allow inherited assets to be managed over time rather than transferred immediately to a beneficiary as a lump sum.

This may be appropriate where a beneficiary is young, has a disability or other vulnerability, has difficulty managing financial affairs, or where the Will-maker wishes to provide a structured approach to the management and distribution of an inheritance.

Who Controls a Testamentary Trust?

The Will establishes the testamentary trust and identifies who will act as trustee, who may benefit from the trust and the powers available to the trustee.

The trustee is responsible for administering the trust in accordance with the terms of the Will and applicable law.

Choosing an appropriate trustee is therefore an important part of establishing a testamentary trust.

Administration and Ongoing Costs

A testamentary trust can involve additional administration after the death of the Will-maker.

Depending on the trust and its activities, ongoing requirements may include accounting, taxation, record keeping and professional advice. These administrative requirements and costs should be considered when deciding whether a testamentary trust is appropriate.

Is a Testamentary Trust Right for You?

There is no single estate value at which a testamentary trust automatically becomes appropriate.

Whether a testamentary trust should be included in a Will depends upon matters such as the nature and value of the estate, the circumstances of the beneficiaries, family circumstances, taxation considerations and the objectives of the Will-maker.

Legal advice should be obtained when deciding whether a testamentary trust is appropriate for your estate plan.

Testamentary Trusts and Your Estate Plan

A testamentary trust forms part of a broader estate-planning strategy and should be considered together with your Will and other arrangements for managing your affairs.

Learn more about Probate, Wills and Deceased Estates.

Learn more about Wills, Powers of Attorney and Enduring Guardianship.

Speak to Russell Kelly & Associates

Russell Kelly & Associates can discuss whether a testamentary trust may be appropriate as part of your estate planning and explain how it can operate alongside your Will and other estate-planning arrangements.

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This information is general in nature and does not constitute legal or taxation advice. The suitability, taxation treatment and asset-protection implications of a testamentary trust depend on the Will, trust structure, estate assets and the circumstances of the beneficiaries. Legal, accounting and taxation advice should be obtained about your particular circumstances.