Testamentary Trusts

Testamentary Trusts

What are Testamentary Trusts?

Testamentary trusts are trusts that are established according to the instructions in a person’s Will and come into effect upon their death. Key features include:

  1. Creation and Activation: They are created within a will and only become active after the will goes through probate.
  2. Purpose: They can provide for minor children, dependents with special needs, or others who may need help managing their inheritance.
  3. Control and Flexibility: They allow the testator (person creating the will) to control how and when assets are distributed, often over a period of time or upon the beneficiary reaching a certain age.
  4. Trustee: A trustee is appointed to manage the trust according to the testator’s instructions.

Testamentary trusts can offer tax benefits and ensure that assets are managed responsibly, especially when beneficiaries are not ready or able to manage large sums of money on their own.


Why would you want a Testamentary Trust?

A testamentary trust can be beneficial for several reasons:

  1. Providing for Minor Children: It ensures that assets are managed and distributed responsibly until children reach a specified age or milestone.
  2. Supporting Dependents with Special Needs: It can provide ongoing financial support without jeopardizing eligibility for government assistance programs.
  3. Controlling Asset Distribution: It allows the testator to specify conditions for distributions, such as reaching a certain age, graduating from college, or achieving other milestones.
  4. Protecting Beneficiaries: It can safeguard assets from creditors, lawsuits, or poor financial decisions by the beneficiaries.
  5. Tax Benefits: In some cases, testamentary trusts can offer tax advantages by spreading out the distribution of assets and potentially lowering tax liabilities.
  6. Professional Management: Appointing a trustee can ensure that the assets are managed by someone with financial expertise, providing peace of mind that the assets are handled prudently.

Overall, a testamentary trust provides a structured and controlled way to manage and distribute assets according to the testator’s wishes, ensuring the beneficiaries’ needs are met appropriately.


Testamentary Trusts and Family Law

Assets held in a testamentary trust may also be protected against Family Law litigation brought by spouses who look to make a claim for family assets within the context of a marriage breakdown. An inheritance held in a testamentary trust is unlikely to be the subject of a Family Court Order, although it may be regarded as a financial resource and thus impact upon the actual terms of a property settlement.

If a beneficiary receives their share of a deceased’s estate in a trust, and it remains in the trust, it cannot be subject to a Will change on the death of the beneficiary, as it would not be considered part of their estate.

How does a Testamentary Trust Work?

A testamentary trust operates by transferring assets into the ownership of a trustee, who manages all trust assets, earns income, and handles capital gains from investments. The trustee establishes a dedicated bank account for the trust and assumes responsibility for filing the trust’s income tax returns.

To ensure the trust remains tax-efficient, all income and capital gains must be allocated to beneficiaries annually, a process confirmed by a resolution signed by the trustee. Beneficiaries who receive income from the trust must include it in their personal tax returns and pay applicable taxes.


Possible tax benefits and asset protection

Tax benefits and asset protection are significant advantages of testamentary trusts. Normally, minors receiving trust income face high tax rates, but under a testamentary trust established from a deceased estate, they are taxed at standard adult rates with a higher tax-free threshold.

Furthermore, testamentary trusts shield assets from being considered the property of beneficiaries in legal matters like bankruptcy. In contrast, assets directly inherited and owned by a beneficiary could be vulnerable to creditors’ claims if the beneficiary’s business fails.

It’s important to note that while testamentary trusts offer substantial protection, they aren’t entirely foolproof. Nonetheless, they provide far more security for beneficiaries than direct inheritance.

In conclusion, recommending a testamentary trust in one’s will grants beneficiaries the option to inherit assets under its protective umbrella. This allows each beneficiary the ability to safeguard and manage their inheritance effectively. While the effectiveness of such trusts may evolve over time, embedding provisions for a testamentary trust in a will does not compel beneficiaries to use it, but rather equips them with the opportunity to leverage its potential benefits fully.

If you would like to speak with someone with respect to the effectiveness of Testamentary Trusts in your individual circumstances, please don’t hesitate to get in touch. 

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