Testamentary Trusts
Trusts to die for - but often overkill!
A “Testamentary Trust” is simply a trust established in your Will.
It has been common practise for many years for simple trusts to be established in a Will, for example monies held on trust for infant children until they reach a certain age.
Testamentary Discretionary Trusts (TDT’s) are much more sophisticated, in that:
• A separate TDT can be established for each of your intended beneficiaries
• Each intended beneficiary is then placed in control of their own particular
TDT, (which may only occur on them attaining a certain age)
• The beneficiaries of each TDT can be a potential broad category of people.
Example:
You have three children and wish to create a TDT in your Will for each child.
Your Will provides that 1/3 of your estate is settled on each TDT.
Each child (on attaining a certain age) would take control of their own TDT. The first advantage here is that the property is not owned by the child personally but by the child on trust for that trust. First Advantage – asset protection.
Each child has a broad group of people that they can choose to benefit from their TDT, including themselves, their spouse and their children.
Second Advantage – children are treated as adults for taxation purposes under this type of trust. Therefore income can be effectively split for potentially huge taxation benefits.
Beneficiaries can be narrowly or broadly defined. It is usual that capital beneficiaries would include only those within your bloodline. Third Advantage - protection of your estate for subsequent generations without being dragged into property settlement disputes on matrimonial breakdown.
If a TDT interests you as part of your estate plan, we recommend that you speak with your lawyer about this.
Tips:
- Unless Asset protection for a beneficiary is a driver TDT’s are usually only warranted for larger estates, in our experience estates with a net value of $500,000.00+ to be settled on each Testamentary Discretionary Trust.
- As there are many unique issues to consider in the establishment of Testamentary Discretionary Trusts wills with them are much more expensive than standard Wills.
- If it is likely that your beneficiaries will use their share of your estate for personal debt reduction (e.g. paying out the home loan) there is little advantage in TDT’s.
on April 5th, 2006 at 2:24 am
Dear Sir / Madam,
My parents are looking to update their will and last testament. It has been
extremely difficult for them to obtain competent legal advice and they have already spent over 2 hours with one solicitor who still doesn’t seem to be
able to advise them on how best to protect the interests of their benificiaries on their passing.
After surfing the internet and in coming accross your web-site, it appears that a Testamentary Discretionary Trust is how they wish to proceed. Can you advise whether you have the appropriate “Law Pack” for this purpose
and also for a new Enduring and Cascading Power of Attorney to be set up? They are residents of the ACT.
Your response would be much appreciated and many thanks.
Response:
Thank you for your comments.
Testamentary Discretionary Trusts (which have life for many years after the death of the Will maker) are by nature complex and your parents will be well served to engage a lawyer who assures them that he/she has prepared many such documents. We do not have a LawPack for this because of the complexity and uniqueness of each situation.
An Enduring Cascading Power of Attorney, is in my understanding, simply an Enduring Power of Attorney with alternate appointments in the event that the first attorneys are unable or unwilling to act. We do not have an ACT Enduring Power of Attorney LawPack at this stage.
Onlinelegal
on July 17th, 2006 at 6:38 am
Thank you for the opportunity to ask this question.
My parents’ assets have always been held in my father’s name only.
My father has always ignored my mother’s objections to this.
He has recently placed all of these assets inside a trust (?testamentary)
How can my mother claim her share of these assets?
She is concerned that there will be no provision for her upon my father’s death
She is an unassertive person and will not proceed with a property settlement.
They are not separated and live in Queensland
max
Response:
A testamentary trust can only be created via a Will and the Will Maker must of course have died for the Will and the trust to have become operative.
If your father is still alive, and the assets have been moved, they would have to have been placed into a trust which has already been created (e.g. a discretionary trust). This trust will most likely continue to have life after your father’s death.
There is a real risk that if the assets have been moved before your father’s death, they will not form part of your father’s estate that your mother would have a claim to via a “Family Provision” Application.
I do recommend that, as hard as it is, that your mother takes prompt independent legal advice, or rights to seek to have access to a legitimate share of the estate may be lost.
Regards
Onlinelegal
on August 3rd, 2006 at 3:19 am
Hi Andrew,
Thanks for the article, a few questions:
As to asset protection, if the primary beneficiary is also trustee of their trust, I presume the courts will look beyond the trust and consider the assets to be the personal assets of the primary beneficiary?
Response:
Not necessarily. This is a complex question. It depends on how the trust deed is structured and whether the beneficiary has a “vested interest” in trust property.
So if a primary beneficiary was going through a divorce, how could you avoid the trust assets being subject to a property settlement? Would appointing a new trustee be sufficient?
Response:
This is a separate issue again, as the net for inclusion of “matrimonial property” is wider than just what is in the name of a party to the marriage, to broadly include assets that a party to the marriage have contributed to directly or indirectly.
If the intention is to shelter assets from potential property settlement disputes, a pre-nuptial agreement or simular would be required and specific specialist family law advice should be taken.
Secondly, you say that unless asset protection is the predominant reason for a TDT, it is not worth it for estates less than 500K. Would it not be a good idea to have one regardless of the size of your estate seeing as though you don’t know what will happen between the date of making the will and your death (i.e. you could win the lottery!). Isn’t it a good way to ’set and forget’ your will?
Response:
Good point. However the extra costs of setting up a testamentary discretionary trust in your Will and and administering it following death need to be warranted.
Additionally, there is no set and forget Will. You Will should be reviewed every year or so or sooner if major life changes occur. Our Will LawPack allows for this.
Regards
Onlinelegal
on August 14th, 2006 at 5:55 am
I have a question about Testamentary trusts. I wanted to know whether, once minors reach the age of 18, the Trust can still continue such that eventual arrival of grandchildren and even great-grandchildren can benefit from the Trust? I intend purchasing a precedent and drafting the document myself for brief perusal by a lawyer (to save costs)
Response:
Yes a Testamentary Trust can continue to have life for many years from the death of the Will maker well after minors reach 18 years of age and benefit multiple generations.
Testamentary Discretionary Trusts are highly complex documents that run for multiple pages with sophisticated clauses for succession of control and trustee powers, so I would have my doubts that a lawyer would work from the base that anyone else had drafted. I say this as the time to change what was drafted by another can often be longer than working from your own precedent.
Regards
Onlinelegal
on December 4th, 2006 at 1:06 am
Great site.
Does there need to be exact wording in your will to set up testamentary trusts for children?
My sister recently passed away leaving three orphaned children. She wrote about the residual of the estate “these are to be held in three testamentary trusts for the children” Is this adequate?
How then do I actually set up the Trusts, do I engage a Solicitor or can an Accountant do it?
Thanks
Bruce
Response:
You will need to take specialist succession law (legal) advice on this. The trust(s) must be established via the will for them to be testamentary trusts. There are certain minimum elements required in order for there to be sufficient certainly to create a trust.
Regards
Onlinelegal
on December 4th, 2006 at 3:21 am
How can I find out if my father had a Testamentary Trust set up before he passed away in Queensland?
Please advise with any information.
Thank you
kaylene knight
Response:
A Testamentary Trust (if any) is established via the Will of your father or a Binding Death Nomination (for a Superannuation entitlement). Your local lawyer can assist you with enquiries and searches.
Regards
Onlinelegal
on January 10th, 2007 at 2:25 am
A farming couple, nearing retirement operate a family farm on which they have set Blooline Trusts for their 3 children. The main farming business (excluding one farm disconnected to others willed to their two daughters) has been willed to their son’s Bloodline as a Testamentary Trust. The farming couple are no longer able to operate the farm and rely heavily on their son to operate the entire business from this point forward. The business is also in such a financial state that it cannot pay their son wages. The business has opportunity and can become financially viable with their son’s input and management. Legal advice to their son clearly states the he should not invest any time or money in the business/property until he has ownership of the property or trust. Legal advice to the parents clearly states they should not relinquish any property rights until death so their retirement is secured.
We have a legal stalemate, How can this be resolved? Can the trust be changed from Testamentary to Inter-vivos , if so will this cater for the legal rights of both parties, 1. The son gets the security he needs for his investments and 2. The parents get the security they need for their retirement?
Regards,
Farmer Brown
Response:
Firstly, a couple of observations:
- a Testamentary Trust does not come into existence until its maker dies (it can’t). So unless some Will Promise / Deed has been entered into that obliges the parents to deal with the farm in this way, they can change their minds and their Wills at any time before their death. I assume they still have capacity.
- moving the ownership of the property now, even into an inter-vivos trust may trigger adverse revue implications (e.g. Capital Gains Tax and Stamp Duty).
It seems to me that someone has to stump up the cash to obtain another legal opinion from expert succession planning lawyers to provide some options for the parties that considers all interests and revenue implications.
Regards
Onlinelegal
on January 15th, 2007 at 2:25 am
If a testamentary trust is set up and assets have been moved from the estate into that trust. Can the estate now borrow funds against the assets (ie for future income of the beneficiaries)?
Response: This is a matter for specific advice depending upon the trustee powers. Often the answer is yes.
Furthermore, can non-estate assets be added to the trust? (therefore making it more like a Discretionary Trust).
Response: No as they are not the property of the Will maker.
Can the first be done if stipulated in the Will or can a deed of amendment suffice?
Response: Is there a power of amendment in the terms of Trust? Specific advice should be taken.
Onlinelegal
on January 19th, 2007 at 6:41 am
I am married with two adult children. My will leaves all of my estate to my wife should she outlive me. I wish to redraft my will to include for a 3 Generation Testamentary Trust.
Please advise whether your templates include this option, or whether you provide additional text to cover it?
Regards, David
Response:
By a 3 Generation Testamentary Trust I assume that you mean a Testamentary Discretionary Trust. No, our Will LawPack does not provide for these. These are complex structures with a potentially long life and require carefully considered and tailored specialist advice from a lawyer.
Regards
Onlinelegal
on February 8th, 2007 at 2:41 am
My wife’s father is a German citizen. Is it possible for his will to set up a TDT in Australia for my wife and our children?
Thanks,
Jeremy
Response:
The short answer is possibly yes. The longer answer is going to require some specific legal and taxation advice after considering the nature and location of assets forming part of our your father-in-law’s estate and the laws relating to the holding of those assets. This will need to be followed by some careful drafting.
Regards
Onlinelegal
on April 11th, 2007 at 8:02 am
My father passed away 7 months ago with my sister and I and his mother as his only beneficiaries, he wanted my grandmothers share in a testamentary trust with my sister and I in control of it and the money was to go to us in the event of her death. There was a part of his will that said we could give the money directly to her bank account if we chose to which we did. She has since passed away and changed her will so my sister and I are no longer her beneficiaries, do we have any claim on my dads portion of her money as it was stated in his will it was to go to us in the event of her death? Thankyou
Response:
This factual situation is complex and will require specific carefully considered legal advice. Find a lawyer.
Regards
Onlinelegal
on April 21st, 2007 at 5:45 pm
If Testamentary Trusts have been set up for three children of the person making the will, can a fourth child contest these trusts and use the estate monies for this contest?
Response:
A forth child could still make a claim against the estate. Swift specialist advice should be sought as time limits are important. Specific advice should be sought on costs. Find a lawyer.
Regards
Onlinelegal
on May 9th, 2007 at 5:11 am
Greetings.
My wife and I are intending to rewrite our wills. The estate will be left to the surviving partner. However on that person’s death we would like to leave our estate to be divided among our young grandchildren when they are eighteen. Currently only 4months to 6 years. The estate on today’s value is about 500 thousand. What is the best way? Our son and daughter have no need for assistance from us.
Regards
Ron
Response:
Even if your son and daughter have “no need of assistance” they are within the category of people who can bring a “family provision application [challenge]” against your estate if adequate provision is not made for them.
Therefore, I strongly recommend that you only take a course like this after taking specific legal advice from your usual lawyer as there are many factors to consider. Find a lawyer.
Regards
Onlinelegal
on June 22nd, 2007 at 3:50 am
Thank you for allowing me to ask a question.
My husband has recently set up a discretionary family trust of which he is the trustee; and a company of which he is the sole Director and secretary. He has advised that this for tax advantages. I am not a Director of the company but am a 50 % shareholder and I also hold “B” class shares. (whatever they are?) I have only had to sign an application for shares form.
I do not really understand any of the legalities involved. While I trust him to have my and our children’s best future financial interests in mind, I want to know that, in the event of a marriage breakdown, my financial position and protection is ensured.
I would appreciate any advice. Thank You
Response:
It seems that you have little or no control over the trust or the company or any assets in them.
My practical suggestion is that you ask your husband that you both keep an appointment with your lawyer to take some Succession and Estate Planning advice so that you can understand what will occur in the event of death or incapacity.
At the same time (as a related but tangential question) the issue of what is included in “matrimonial property” could be raised.
Regards
Onlinelegal
on June 23rd, 2007 at 1:48 am
I have three adult children and I am divorced from my husband. I have a will that currently leaves all my assets to only two of my daughters. I am told that my third daughter can dispute my will on my death. So I am thinking maybe I should organise a trust. What kind of trust should I set up? Are they very expensive to create and maintain?
Thank you
Sophie
Response:
Yes, your third daughter can bring a claim against your estate that “adequate provision” has not been made for her. There may be very good reasons for not benefiting her under your Will but these should be documented by your lawyer for you in a statement under oath (e.g. an Affidavit).
Assets that are in a Trust do not form part of your estate and so even if a claim is brought there may be little value in the estate.
Set up costs of a Trust are relatively cheap. The costs of maintaining it depend upon what assets are held in it and how active you are in “book keeping” for it. A Tax Return will also be required.
Care needs to be taken about:
- costs (including duty and tax) of moving assets;
- succession of control of the trust on your death or incapacity;
- costs of moving assets out of the trust by the next generation.
I suggest that you keep an initial appointment with a lawyer so that these things can be better explained.
Find a lawyer
Regards
Onlinelegal
on July 3rd, 2007 at 6:00 am
My client lost her husband last year. Their joint simple Will incorporated a Testamentary trust in the name of the deceased for the purpose of holding the deceased’s assets / share of assets in trust for beneficiaries of the estate, with my client as trustee. They were advised to split jointly held assets into individually held assets for simplicity. However, my client’s husband died suddenly before this could take place. My understanding is that my client, as trustee still retains the power to split the assets with half going to the trust and half remaining in her name. Can you confirm or correct this?
Response:
No, I wouldn’t think so. It is likely that jointly held assets are held as “joint tenants” where the property goes to the survivor by way of “survivorship” quite independently of the Will.
Even if this is the case, the widow, as sole owner could then deal with the whole of the property in her Will.
Regards
Onlinelegal
on August 16th, 2007 at 4:19 pm
I was told that a blood line trust offers no protection for assets held within it when it come to divorce settlement as the court will look beyond the trust to see who is in control of the trust and if the controller or major beneficiary is undergoing a divorce settlement the asset within the trust can be seized as part of his/her asset and included in divorce settlement. Is this correct? I thought that it is supposed to protect the asset within the trust to family blood line members only. Can a testamentary trust also be a blood line trust at the same time?
Response:
You need to distinguish between a trust established by a living person (inter vivos trust) and a trust established via a person’s Will, which is only established when the person dies (testamentary trust).
Assets held in an inter vivos trust which is controlled by a particular person would be at risk during a property settlement involving the controller (particularly if the wealth was accumulated during the marriage).
Assuming that a Will cannot be attacked for failure of form or failure to make adequate provision for a beneficiary who had a legitimate expectation, I doubt that a carefully drafted testamentary trust would be open to the same risk factors.
You will need to take specialist and carefully considered legal advice.
In answer to your second question, yes, a testamentary trust can be a “bloodline trust” which usually means that the beneficiaries (income and/or capital) are limited to people in a particular bloodline.
Find a lawyer
Regards
Onlinelegal
on August 19th, 2007 at 12:53 am
To what degree of detail must a testamentary trust be set up in a will?
Response:
There must be sufficient certainty of property, beneficiaries and terms.
Is it necessary to have the full trust deed set up or does it suffice for the testator to state his wish to set up a testamentary trust, names the trustee(s) and beneficiary(-ies) and states how the beneficiary(-ies) should benefit?
Response:
An expression of wish is not enough. There must be a direction.
A simple trust will work while beneficiaries are under age as long as it is accompanied by a broad power for the trustee to apply funds for education, maintenance and advancement in life of the beneficiaries. Our Will LawPacks do this.
However, if you have in mind a long term “Testamentary Discretionary Trust” where the beneficiaries are of age and manage the estate in that structure long term, the terms need to be detailed (essentially as detailed as a normal discretionary trust but embedded in the Will). There is no one size fits all in this situation and you will need to take specialist legal advice. See >> Find a lawyer.
Can the testator determine what should happen with the testamentary trust if the beneficiary dies, i.e. name a different beneficiary or state that the trust should be dissolved and X,Y,Z should receive the benefit?
Response:
Yes, but this needs to be carefully worked into the terms of the trust with particular attention being paid to potential tax consequences.
Regards
Onlinelegal
on January 28th, 2008 at 3:37 am
Question, I was divorsed and have now re-married. I have one child who is currenlty 9. If I set up a testamentary trust allowing for my son to recieve what I have been paying in Child Support can I have my current wife as Trustee. My concern is that I don’t want my ex draining any funds claiming that they were for education etc. I want the funds to be controlled for my sons benefit.
on February 8th, 2008 at 11:25 am
I am 59 years old recently unemployed have two children one 32 years and the other a son 34 years old and has a developmental learning disability on a dissability pension.
My wife and I are seperated for 14 years not divorced, we both have seperate wills but I would like to set up a trust for my son in a new will.
With his equal share of my estate I want him to have his independance with an allowance for his needs plus a home in his name where he can live in private.
Do I need to see a public solicitor or trustee or is it safe to have this set up with a private solicitor as a trustee.
Regards david thomas