Noble Law Expertise in Estate Planning Will and Trusts
Why set up a Testamentary Trust?
Testamentary Discretionary Trusts (TDT's) are an increasingly popular estate planning vehicle incorporated in your Will (as we will discuss below), but they are not suitable to everyone. It is important to give careful consideration to the use of all forms of Testamentary Trust prior to their use, by seeking specialist estate planning advice.
Asset Protection
Testamentary Trusts offer significant asset protection advantages.
As the beneficiary does not own the assets of a TDT this provides scope for asset protection, similar to that which a Family Discretionary Trust provides.
Your trustee, not your beneficiary, is the legal owner and controller of your estate assets and holds these assets for the benefit of your intended beneficiaries. The beneficiaries only have the right to ensure the trust is properly administered.
This difference between ownership and control of assets may have the advantage of helping to preserve your estate assets. In our experience, there are three common concerns that clients have when discussing asset protection and the distribution of their estate:
1. Protecting the estate from creditors of a beneficiary2. Protecting the estate from marital misadventure of a beneficiary3. Protecting the estate on behalf of a beneficiary with special circumstances
Protection from Creditors
Generally, as the beneficiary does not have a proprietary right in the assets of the TDT, the beneficiary therefore does not have a right that is capable of being vested in the trustee in bankruptcy and therefore the assets cannot be accessed by creditors. Subject to limited exceptions, the Bankruptcy Act 1966 (Cth) does not permit the trustee in bankruptcy to access funds that form part of trust property on behalf of the beneficiaries’ creditors.Protection from the breakdown of a relationship of a beneficiary.
In recent years, the Family Court has shown a willingness to treat the assets of trusts as a financial resource or in some cases as property of a party to a marriage or relationship. If a willmaker is concerned that their child may, after receiving their inheritance, suffer a relationship breakdown, there are a number of options that can be canvassed with the willmaker that may minimise the risk associated with the treatment of the assets of the TDT by the Family Court.
Protection from Beneficiaries with special circumstances
If a primary beneficiary has a problem such as gambling or drug dependency, a Testamentary Trust controlled by an independent trustee can protect the assets from being wasted. The trust fund can be used to look after the long term interests of the beneficiary as well as others such as the beneficiary’s children.
What are the disadvantages to establishing a TDT or any other types of Testamentary Trusts?
In addition to the likely additional cost borne by the willmaker when preparing a will containing a Testamentary Trust, there will be ongoing costs including accountancy fees for taxation advice and preparation of trust taxation returns and the cost associated with the establishment of the trust. It is worth noting that the ongoing costs do not commence until after the willmaker has died.
Factors that you should take into account, include a consideration of whether the income generated by your estate will be sufficient to warrant a testamentary trust, or whether there are beneficiaries with special needs (such as a beneficiary with an intellectual impairment). If beneficiaries are vulnerable, the benefit of implementing a Testamentary Trust may well outweigh the costs associated with maintaining it.
It is important to note that the information contained in this Fact Sheet is general in nature and every family circumstance is different. It is therefore important to obtain specialist advice prior to making a decision about whether Testamentary Trusts are suitable for your family.
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