I’m Worried About Writing My Will Because I’m Scared the Assets Will be Dissipated
A common worry people have when planning to distribute their estate is that their assets will be mismanaged, lessened, or even entirely dissipated soon after their passing. One option which is available to persons with this worry is to create what is known as a testamentary trust.
What is a Testamentary Trust?
A trust is an arrangement where one party gives another party (the trustee) the legal right to assets to retain for the benefit of another person (the beneficiary) for a certain period of time, or until certain conditions are met. A testamentary trust is a trust which is created in a will, and can include some of, or all the assets in the will-maker’s (testator’s) estate. Unlike a living trust, a testamentary trust only comes into existence after the death of the testator and can continue for a period of 80 years.
What are the Benefits of a Testamentary Trust?
Testamentary trusts are primarily used to protect the trust assets from any claims against, or misuse by the beneficiaries. This is possible because under a testamentary trust the legal right to the trust property is the trustee’s not the beneficiaries’. Some common scenarios where this would be beneficial are:
Where one or more of your beneficiaries are facing Family Court proceedings a testamentary trust would prevent the Court from making an order requiring them to distribute the assets;
Where you are concerned that your spouse may remarry, and your estate will be diverted to their new family you can use a testamentary trust to prevent them from doing so;
Where one or more of your beneficiaries is economically wasteful or has a gambling, drug or alcohol addiction you can ensure they do not dissipate the assets by having them managed by the trustee;
Where one or more of your beneficiaries is disabled or impaired and you wish for them to be able to rely on your estate for as long as possible;
Where one or more of your beneficiaries is a child and you wish for them to not to have control of the assets until they reach a certain age.
Another benefit of setting up a testamentary trust is that there can be tax advantages for the beneficiaries. For instance, tax on income, capital gains, and franked dividends can be distributed amongst your beneficiaries, as the trustee can use their discretion to distribute the trust funds in a way that takes advantage of each beneficiary’s marginal tax rates. Moreover, trusts do not have to pay tax on income which is distributed to beneficiaries, which means your beneficiaries will be able to enjoy more of the estate. However, it should be noted that trusts must pay tax on undistributed income.
What are the Disadvantages of a Testamentary Trust?
The primary disadvantage of a testamentary trust is the administrative fees of the trustee. If you employ a professional to manage the trust assets, there will be a number of costs associated with them doing so. Consequently, it is important to consider whether the income generated by the potential trust would be sufficient to warrant its creation. If you are unsure, it may be worth considering adding a testamentary trust as an option in your will, allowing the trustee to make the decision as to whether to implement the trust at the relevant time.
Another disadvantage is that the discretion afforded to the trustee may cause conflict between the beneficiaries. Where the appointed trustee(s) are family members, it may cause problems between them or with beneficiaries. Further, if the trust restricts one or more beneficiary’s access to income, they may become upset and attempt to challenge the will. A way to seek to avoid this is to communicate your wishes clearly to your beneficiaries at the time of the creation of the trust.
There may also be tax implications for exemptions from capital gains tax on your residence if it is held in a testamentary trust, and for tax concessions for active assets for small businesses. You should always check with a financial advisor to discuss how these issues apply in your specific circumstances.
Due to the complexity of the area, and to ensure your trust is valid, it is always worth seeking legal and financial advice in relation to the establishment of a testamentary trust.
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