Why Australians use Testamentary Trusts

Testamentary Trusts

Testamentary Trusts are an increasingly common element of our clients Estate Planning needs.  So what are they and why have they become almost standard practice?

A Testamentary Trust is a trust that is created by a will.  It’s used by the person who created the will, as a way to improve the chances that their intentions are honoured.

Let’s look at an example.

Imagine you have two children, a son and a daughter, and your wish is that upon your passing, your assets are split equally between the two of them.  Sounds simple enough right?  But of course in families, things are rarely simple.

Your son is married and has 3 kids.  The relationship with the wife is sometimes shaky, and there is the possibility of divorce.  You worry that your estate could end up in the hands of your daughter in law one day, who may then re-marries, and the assets you’ve built up over many years of hard work end up benefiting some total stranger.

Then there is your daughter, who is officially single, though she has a partner who is around enough to potentially be considered a de-facto spouse.  You detest him and consider him a  bit of a leach.  You worry that if your daughter inherits money, he will find a way to drain it from her.

Without a testamentary trust, your estate will pass to each child directly, and your legacy will be at the mercy of their relationships.  However were you to include provisions for Testamentary Trust’s in your Will’s, your son and daughters share of your estate could have gone into a trust for them instead.  Whilst in the trust, the assets are not theirs, so it can’t form part of a divorce settlement for instance.  The children can then access the funds from the trust at the time that suits them.  Potentially in your daughters case, you could have her and another person act as trustee, with an withdrawals requiring the approval of both trustees.  This may limit the potential of her partner to coax money out of her.

In your son’s testamentary trust, you could have him as the initial beneficiary, with his children nominated as secondary beneficiaries if he was not still alive when your Will was invocated.  Again, this is likely to result in an outcome more closely aligned to our wishes.

Testamentary Trust’s can also have tax benefits, and protect assets in the case one of your beneficiaries is the subject of a commercial dispute – eg. being sued.

I recently asked the solicitor who assists us with our clients Estate Planning requirements the proportion of Wills that she is preparing that include testamentary trusts.  She advised it was around 90%.  That was far higher than I had expected, and frankly, that’s what prompted me to write this post.

Some good general estate planning information can also be found on ASIC’s Smart Money site.

Things like Wills, Powers of Attorney, and Testamentary Trusts are things people tend to put off.  But ensuring that the assets that you’ve spent your whole life building, go to the people you care most about, is important.  If this is something you’ve been putting off, be in touch.

 

Important Information:

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.

About the Author

Paul Benson is a Certified Financial Planner with the Financial Planning Association of Australia, and a Self Managed Super Fund Specialist with the Self Managed Superannuation Association. He is also a member of the Responsible Investment Association of Australasia, and the Ethical Advisors Co-op. He is the proud owner of Guidance Financial Services, a boutique financial planning practice based in Essendon, not far from the Melbourne CBD. Guidance currently manages around $100 million in investments on behalf of their clients, providing bespoke financial planning strategies.

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