Trusts, Wills & Estates

Testamentary Trusts - everything you need to know

Life, as they say, is like a box of chocolates — you never know what you’re going to get next. Death, on the other hand, is a little more predictable despite Woody Allen’s announcement that he’s "strongly against it". As with anything inevitable, planning helps, and if you have a significant estate, a testamentary trust is the way to go. “A what?”, you ask. Please, let me explain.

What’s a testamentary trust?

A normal Will sets out how you want your assets distributed upon your death but a testamentary trust allows your appointed trustee to manage your assets on behalf of your beneficiaries (kids, nephews, charities etc.) over a much longer period of time. He/she manages and invests your trust assets, and makes distributions to your beneficiaries in accordance with the terms of your testamentary trust.

Here’s a list of the advantages of a testamentary trust over a normal Will.

Asset Protection: Testamentary trust assets can’t be claimed by a creditor in bankruptcy or by parties if one of your beneficiaries falls foul of litigation.

Protection from divorce claims: Testamentary trust assets can, in some cases, be excluded from the marriage assets and so not be claimable by the other party in a divorce.

They’re tax effective: A trustee can split the income of the trust and can choose to distribute to the income to beneficiaries who are taxed at the lowest rates. In addition, there’s no Capital Gains Tax on assets which you owned at your death when those assets are transferred from your Testamentary Trust to a beneficiary. Capital Gains Tax will apply, however, in other circumstances.

Protection of beneficiaries: You can leave your trustee with detailed instructions on how to care for disabled or financially irresponsible beneficiaries.

Appointing a trustee

Think long and hard about who you choose because it’s a big decision. They can be an individual trustee (friend or relative) or a professional trustee (usually a company). Situations where you might engage a professional trustee include:

A lack of suitable family members or friends: Not everyone will have the sort of financial awareness, astuteness, acumen and investment capabilities needed to properly manage and administer your trust assets.

To avoid family disputes: It’s a good option if your trustee needs to remain objective and impartial. For example, an individual trustee might find it difficult to distribute the trust assets if he or she has a close and personal relationship with some or all of the beneficiaries. It could also be uncomfortable for an individual trustee to act if there’s bad blood between family members.

Your situation is complicated: If your tax scenario is very complex or your beneficiaries form part of a blended family, your trust can be quite complex, and so, perhaps best left in the hands of a professional.

Disadvantages of appointing a professional trustee

While a professional trustee may be right in certain circumstances, don’t appoint one for fear of burdening family or friends with a time-consuming role after your death. In the long term, the role of trustee actually allows them to retain control over your trust. With that in mind, here are the disadvantages of a professional trustee.

They’re not cheap: They take a percentage of the trust or charge a minimum fee, whereas individual trustees generally perform their duties for free. And while trustees must act in the interests of the beneficiaries, in a limited sense, professional trustees are “exempt” from this because they are allowed to draw fees under Part IV of the Trustee Company Act 1984 (Vic), being money that would have otherwise been available to the beneficiaries.

They’re distant/removed: Professional trustees prefer to deal in cash and securities. When dealing with other assets, like a family business, a professional trustee may lack the inside working-knowledge of that business and decide to sell it. Also, they may be too removed from your spouse, disabled family member or favourite charity to properly fulfil your wishes.

Loss of control: A professional trustee has decision-making powers over your trust and may make decisions that upset your beneficiaries.

There are many factors influencing the best testamentary vehicle for you, whether it’s a basic Will or a testamentary trust with an individual or professional trustee. If you have any more questions, our friendly Wills and Estates team are only too happy to help. 

Chevi Levin - Lawyer