Testamentary Trusts

Testamentary Trusts Explained and Its Advantages

There are various types of Trusts that can be formed in order to plan your estate properly. Not only does a trust help to separate the control and the benefits of various assets, but it is also a more tax-effective way to leave assets to heirs and other beneficiaries. Of all the various trust options available for estate planning, testamentary trusts are one of them. This article explains what a testamentary trust is and also the main reason why people opt for testamentary trusts when planning their estates.

What are Testamentary Trusts?

The most basic definition of a testamentary trust is that it is a trust that is created as part of a Will. When a person dies leaving behind a will, and if that will states that a testamentary trust should be created and all their assets should be transferred to the trust, then such a trust comes into effect when the settlor (or the creator of the will) dies.

When planning their estate and creating a will, most people may opt to leave their assets to their heirs as part of their will. Hence, upon the death of the person and once the will is probated, all the assets will be distributed among the surviving heirs as mentioned in the will. The beneficiaries are typically the spouse or partner of the deceased as well as any surviving children. However, there may be certain circumstances due to which a person may not want to immediately give their assets to their heirs. They may want the assets to go to their heirs at a later date in life. In such situations, the settlor may choose to add a provision for a testamentary trust in their will. With such a provision in place, the testamentary trust will be created upon the death of the settlor and all their assets will be transferred in the name of the trust.

Usually, a trustee will also be appointed for the testamentary trust. It is the responsibility of the trustee to manage the trust till such time as mentioned in the will. Once the period mentioned in the will has elapsed, all the assets of the trust will be transferred to the legal heirs or beneficiaries of the trust.

What are the Advantages of Creating Testamentary Trusts in Australia?

The main advantage of creating a testamentary trust is to delay the transfer of assets to the heirs of a will or the beneficiaries of a person’s estate. For example, if a parent has very small children who will reach adulthood only after several years, then that parent may not want his minor children to be burdened with the management of all their assets. In fact, if the children are still too young when the parent dies, they may not even be in a position to manage their assets and other properties. In such situations, the parent can add a clause for the creation of a testamentary trust in their will and specify a certain age at which his children will get control of all the assets of the estate.

The main advantage of creating a testamentary trust is to delay the transfer of assets to the heirs of a will or the beneficiaries of a person’s estate.

Assuming the parent dies when the children are still minor, a testamentary trust will be created after the will is probated and all the assets will be transferred in the name of the trust. The trust will then be managed by the appointed trustee and he will be responsible for investing and handling the assets for the beneficiaries, who are the minor children. Once the minor children reach the age specified in the will, for example the age of 25 years; all the assets of the testamentary trust will then be transferred to the children at that age. However, any income that arises from the assets of the trust will be the sole property of the beneficiaries of the trust. Hence, by creating a testamentary trust, it is not only possible to protect minor children’s interests, but it is also possible to distribute the income of the assets among several people and lower the overall tax liability.

We can understand this advantage better with the help of an example. Let us assume that a man who has a wife and two minor children has died and left behind assets worth $200,000 in his will. If there is no testamentary trust then the assets will pass to the wife. Any income that accrues from this money will then be taxed in the wife’s name alone. However, if the man was to create a testamentary trust and name his wife and kids as the beneficiaries, then the income that accrued from the assets would be divided among three people instead of just one, thereby lowering the overall tax burden.

Appointing a Trustee for Testamentary Trusts

Since the trustee will manage all the assets of a testamentary trust till such time that it passes to the beneficiaries, it is very important to appoint a person who is trustworthy. The assets of the trust will grow or be depleted according to the investment options chosen by the trustee. Hence, it is vital that a responsible and knowledgeable person be chosen as trustee so that a person’s assets can be protected for their rightful beneficiaries. Since the trustee may be required to handle the trust for several years before the beneficiaries come of age, there could be trustee fees to content with, especially if the trustee is a professional. However, it is often more cost effective to pay for the professional advice of a trustee rather than leave the assets in the hands of minor children.

Testamentary trusts are regularly examined by the probate courts so that they can monitor that the trust is indeed being run and managed in the best interests of its beneficiaries. Hence, if a testamentary trust is valid for several years, it is the responsibility of the trustee to make sure that it is periodically examined by the probate courts.

While a trustee is typically mentioned in the Will, the appointed trustee can refuse to accept responsibility of the testamentary trust since it can be an extremely time consuming and complex duty. In such cases, the probate court usually appoints a trustee from among the friends and family members of the beneficiaries of the testamentary trust.

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