16th Sep, 2010
Testamentary Trusts – Controlling From The Grave
What is a Testamentary Trust?
A Testamentary Trust is a discretionary trust which is created in your Will. A discretionary trust (when created during your lifetime is usually called a family trust) is where a person or company (trustee) holds property, business or investments on trust for the benefit of a number of people and related parties (beneficiaries). The trustee has the total discretion to distribute the income and capital of the trust to the beneficiaries. Creating a Testamentary Trust in your Will is often a more effective alternative than making a direct gift to a person under a standard Will.
What are its advantages?
• Tax Minimisation
By distributing income between beneficiaries, the trustee is able to manage the total income tax payable by the group. Keep in mind that the tax position for a family trust created during your lifetime is different, as not as much income may be distributed to children under 18 years without paying extra tax.
• Protection from divorce
If a beneficiary (say your child) separates and is involved in matrimonial property proceedings, it is possible by using the Testamentary Trust to keep your child’s inheritance separate from his or her own assets, and therefore quarantine it from a claim by the separated spouse. In this way, your estate is left to your direct descendants, rather than being divided between in-laws.
• Protection from bankruptcy
If a beneficiary gets into financial difficulties, even though he or she may be bankrupt, the gift given to them via the Testamentary Trust will be protected from that bankruptcy. These days, when more and more people are involved in financial activities (such as giving guarantees for business, borrowing or investment etc) this may be an important protection for your surviving family.
• Protection for a person suffering from an incapacity
If a person develops some incapacity, such as an intellectual handicap, alcohol or drug dependency, or just may not be able to handle money, rather than give a gift directly to that person, you can have other people control it through a Testamentary Trust.
• Exercising control of your estate
Although a standard Testamentary Trust has total flexibility so the trustee is able to invest in whatever property or assets they wish, and may draw on capital or income from time to time as they desire, you may wish to exercise some control over this. So, with a Testamentary Trust, the capital of the gift may be held ultimately for the children of the beneficiary so that while that beneficiary is alive, he or she has access to income only.
• What assets are included in the Testamentary Trust?
Only assets that are in the deceased person’s name at the time of his or her death are included in that trust. Therefore, it’s important that insurance policies and the ownership of jointly owned properties are reviewed by a lawyer to ensure that they will form part of the trust. Sometimes it is preferable that superannuation money is received by surviving spouses or children, rather than being paid into a trust. It is appropriate to have options in your Will to enable superannuation funds to be paid either to the trust or to individuals.
Definitions of Terms commonly used in Estate Administration
Administrator- a person or entity responsible for administering a deceased estate where there is no Executor. Duties are the same as an Executor’s.
Beneficiary- person or organisation who receives a benefit under a Will or upon an Intestacy.
Creditor- people or organisation to whom someone owes money.
Estate- the sum of the assets (For example, real estate, bank accounts, shares, etc.) and liabilities (For example, credit card debts, mortgage, etc.) of a deceased person. In some cases, it may include superannuation.
Estate Administration- the process of dealing with an estate that enables it to be distributed to beneficiaries. This process requires knowledge of taxation, financial planning and the law.
Executor- the person or entity appointed under a Will to administer the estate of the deceased. An Executor is responsible for the identification, administration and distribution of assets in accordance with the Will and the law.
Finalisation Process- the finalisation process involves reconciling all estate transactions, preparing an estate tax return, and distributing estate assets.
Grant of Probate- Court document formally authorising the Executor to administer the deceased’s estate.
Grant of Letters of Administration- as for Grant of Probate, but the term applies to the Grant given where there is no Will.
Intestacy- when a person dies without a Will they are said to have died “intestate”. In these cases the law determines which family members are entitled to the estate.
Legacy- a gift of money or personal property as specified in a Will. Also called a “bequest”.
Legatee- a person who receives a legacy.
Notice of Intention- a public advertisement giving 14 days’ notice that an application is to be made for a Grant of Probate or Letters of Administration.
Notice of Creditors- a public advertisement giving any potential creditors 2 months to make a claim on the estate.
Testamentary Trust- a trust created within a Will, which takes effect after the estate has been administered.
Testator/ Testatrix- the person making a Will. “Testator” applies to males; “Testatrix” applies to females.
Testator Family Maintenance (TFM) - this term describes a legal claim that a person may bring seeking a share (or a greater share) of a deceased estate. The claimant must show that the deceased had a responsibility to make provision for the claimant but failed to do so. A claim must generally be brought within 6 months of the Grant, and for this reason the estate is in normal circumstances not distributed until this period has expired.
Trust- a trust is created when, for example, Person A gives something to Person B to look after for the benefit of Person C. The trustee is Person B. The beneficiary of the trust is Person C.
Trustee- an individual or organisation which holds or manages and invests assets for the benefit of another.
Will- a legal document in which a person specifies how their estate is to be dealt with after their death.
