Testamentary Trust
A testamentary trust is a trust arrangement that is established through a will and only begins to operate after the will-maker has passed away. It is commonly used in more complex estate planning, particularly where the will-maker wishes that, after their death, the estate is not passed directly to the beneficiaries in a single lump sum, but is instead managed and distributed by a trustee in accordance with the trust terms set out in the will.
For those with minor children, blended families, beneficiaries with special needs, larger-scale assets, company shareholdings, investment properties, or those who wish to protect the financial security of the next generation, a testamentary trust can provide a more flexible way of structuring an estate.
NS Legal can assist clients in assessing whether it is appropriate to establish a testamentary trust within a will, based on their family structure, asset position and succession objectives, and can help draft the corresponding will and trust terms.
What Is a Testamentary Trust
A testamentary trust is not an ordinary trust document that exists separately from the will; it is a trust arrangement written into the will itself.
In the will, the will-maker specifies which assets are to enter the trust, who is to act as trustee, who the beneficiaries are, and how the trustee is to manage and distribute the assets. During the will-maker’s lifetime, the testamentary trust generally does not actually operate; it only begins to take effect after the will-maker’s death, when the estate passes into the relevant trust structure.
Put simply, an ordinary will usually distributes assets directly to the beneficiaries; a testamentary trust instead places the assets into a structure managed by a trustee, which then provides income, capital or other benefits to the beneficiaries in accordance with the terms of the will.
Issues a Testamentary Trust Can Address
The core function of a testamentary trust is to allow the estate to retain a degree of management and protection even after it has been distributed. It is commonly used for the following purposes:
- managing the estate for minor children or young beneficiaries;
- avoiding a situation where beneficiaries receive a large amount of assets all at once and are unable to manage it properly;
- providing long-term arrangements for beneficiaries with a disability, illness or special care needs;
- balancing the interests of a current spouse and children in blended families;
- providing beneficiaries with a degree of asset protection;
- increasing flexibility in the distribution of income and capital;
providing a more stable structure for the transfer of family wealth.
For example, parents may wish for their children ultimately to inherit the estate, but may not want the children to receive all of the assets at once while they are still young. Through a testamentary trust, the trustee can be arranged to manage the assets until the children reach adulthood, and to draw on the trust funds gradually according to the children’s education, living and care needs.
Which Families a Testamentary Trust Suits
A testamentary trust is not necessarily suitable for everyone. For families with a simple asset structure, clear family relationships, and beneficiaries who are all adults with sound financial management ability, an ordinary will may already be sufficient.
A testamentary trust is generally more suitable in the following situations:
- there are minor children;
- there are beneficiaries with special needs or who depend on long-term care;
- the family relationships are more complex, for example involving remarriage, children from a previous marriage, stepchildren or de facto relationships;
- there is concern that changes in a beneficiary’s marital relationship may affect the inherited assets;
- there is concern that a beneficiary may face debt, bankruptcy or business risk;
- there is a wish to preserve more flexible asset-management arrangements for the next generation;
the estate includes property, investment assets, a business or a substantial sum of money.
Whether a testamentary trust is needed should be considered together with the size of the assets, the family relationships, the circumstances of the beneficiaries and the cost of administration.
Choosing a Trustee
Once a testamentary trust has been established, the trustee is responsible for managing the trust assets and for making distribution decisions in accordance with the trust terms set out in the will.
The trustee’s role is very important, because the trustee may need to decide when to sell assets, how to invest funds, whether to distribute income or capital to a particular beneficiary, and how to balance the interests of different beneficiaries.
A trustee may be a family member, a trusted friend, a professional or a corporate trustee. In some cases, a beneficiary may also act as trustee; however, where the family relationships are complex, or where conflict between beneficiaries is possible, the trustee arrangements need to be designed more carefully.
When choosing a trustee, it is usually necessary to consider their integrity, capability, age, place of residence, whether they understand the family situation, and whether they may have a conflict of interest with the beneficiaries.
How a Testamentary Trust Differs from an Ordinary Will
An ordinary will usually distributes assets directly to the beneficiaries once the administration of the estate has been completed. After the beneficiaries receive the assets, they can generally decide for themselves how to use, sell or invest those assets.
A testamentary trust, by contrast, places the relevant assets under the management of a trustee after the will-maker’s death. The beneficiaries may not immediately acquire ownership of the assets, but instead receive income, capital distributions or other benefits in accordance with the trust terms.
The advantage of this arrangement is that the estate can continue to receive a degree of management and protection; at the same time, however, it also means that the trust requires ongoing administration, which may involve accounting, tax, trustee decision-making and record-keeping. For this reason, whether to use a testamentary trust should be assessed in light of actual needs.
Can a Testamentary Trust Protect Assets
A testamentary trust is often used as part of asset-protection arrangements, but the level of protection depends on the trust terms, the trustee structure, the degree of control held by the beneficiaries, and the specific circumstances that arise in the future.
For example, if a beneficiary faces debt, business risk, the breakdown of a marriage or insufficient financial management ability, a testamentary trust may offer more protection than passing the assets directly to the beneficiary. However, a testamentary trust cannot guarantee that risk will be completely isolated in every situation, nor can it be used to avoid legal obligations.
For this reason, when designing a testamentary trust, it is necessary to clearly distinguish whether the client is seeking asset management, protection of minor children, balance among family relationships, tax flexibility, or risk isolation. Different objectives call for different trust terms and trustee arrangements.
Matters to Consider with a Testamentary Trust
A testamentary trust brings flexibility, but it also adds a degree of complexity. Common matters that need to be considered include:
- which assets should enter the testamentary trust;
- who is to act as trustee;
- who falls within the class of beneficiaries;
- whether the trustee has discretion to distribute income and capital;
- when the beneficiaries can acquire the assets;
- whether the trust has a termination date;
- how the cost of administering the trust is to be borne;
- how to reduce disputes between the trustee and the beneficiaries;
whether the trust needs to align with superannuation, a family trust, company shareholdings or insurance arrangements.
If the terms of a testamentary trust are drafted too vaguely, difficulties may arise in administering it later. If the terms are designed too rigidly, they may be unable to adapt to future changes in the beneficiaries’ lives, health, marriages or financial circumstances.
How NS Legal Can Assist
NS Legal can assist clients in assessing whether a testamentary trust should be established within a will, and can draft the corresponding documents based on the client’s family structure and asset position.
We can assist clients to:
- assess whether a testamentary trust is suitable for their current family and asset situation;
- draft a will that includes testamentary trust terms;
- design trustee and alternate trustee arrangements;
- design the class of beneficiaries and the distribution mechanism;
- take into account minor children, beneficiaries with special needs and complex family relationships;
- assist with arrangements between blended families, children from a previous marriage and a current spouse;
- review the relationship between the testamentary trust and superannuation, insurance, company shareholdings and family trusts;
- explain the administrative responsibilities that may arise once a testamentary trust is established;
assist clients to update their existing wills and estate-planning documents.
Frequently Asked Questions
When is it best to set up a testamentary trust?
A testamentary trust suits families that need more complex estate arrangements, for example those with minor children, beneficiaries with special needs, blended families, larger-scale assets, or beneficiaries exposed to debt and family-law risk. For people with simpler assets and family relationships, an ordinary will may already be sufficient.
When does a testamentary trust take effect?
A testamentary trust generally only begins to operate after the will-maker’s death. When the will is signed during the will-maker’s lifetime, the trust terms are already written into the will, but the trust itself generally does not manage any assets straight away.
Can beneficiaries access the money in a testamentary trust straight away?
Not necessarily. Whether beneficiaries can obtain income or capital depends on the trust terms in the will and on the trustee’s decisions. Some trusts allow flexible distributions, while others restrict how the funds are used or when they are distributed.
Can a family member be the trustee?
Yes. Many testamentary trusts appoint a family member as trustee. However, where the family relationships are complex, there is conflict between beneficiaries, or the assets are substantial, it may be necessary to consider more robust trustee arrangements.
Can a testamentary trust protect the assets that children inherit?
A testamentary trust can, to a degree, help manage and protect the assets that children inherit, particularly where the children are young, have limited financial management ability, or are exposed to marital, debt or business risk. The actual level of protection, however, depends on the structure of the trust and the particular circumstances.
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