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Testamentary trusts

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Good estate planning helps to ensure that the right assets pass to the right people at the right time. It can involve a range of instruments, some of which are activated during your lifetime and others following your death.

Testamentary trustsA testamentary trust is one example of a commonly used estate planning tool. The provisions are established under a will and come into effect when probate is granted.

As with all trusts, a testamentary trust involves a Trustee (individual or a group of people or a company) owning assets for the benefit of another. The will should set out the terms of the trust, identify a trustee (or trustees), beneficiaries, an appointor) and the assets that will pass into the trust.

Testamentary trusts can be mandatory or optional, fixed or non-fixed, flexible or protective. They can range from very restrictive trusts that are designed to protect a vulnerable beneficiary, through to fully discretionary trusts that offer much more flexibility.

Depending on your needs, a testamentary trust can be established as a temporary arrangement until your estate is finalised. It can also be designed to exist for the duration of a specific crisis (such as beneficiary bankruptcy or relationship breakdown) or last for many years to provide asset protection and tax advantages for beneficiaries.

Testamentary trusts are commonly used to:

  • provide for and protect beneficiaries with special needs

  • improve tax effectiveness, for both income and capital

  • protect an inheritance from the effect of legal actions brought against beneficiaries.

These trusts can be very useful in situations in which the beneficiary:

  • has a disability (legal, physical or mental) and is incapable of managing their share of the estate

  • is a spendthrift or has a gambling or drug addiction

  • is involved in a family law property dispute

  • has an occupation with a high risk of being sued.

Of course, the benefits of including a testamentary trust in a will need to be weighed against the administration costs. Both the size of the estate and the circumstances of the beneficiaries are relevant in determining the usefulness of this structure. As with any estate planning matter, getting good advice about testamentary trusts from both financial and legal professionals is the key to ensuring you have the right structures in place for your circumstances.

We have a good working relationship with two legal firms, which provide estate planning services.

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