ESTATE PLANNING

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ESTATE PLANNING

A testamentary trust is established under a will and it comes into effect upon the death of the will maker. More than one testamentary trust can be detailed in a will.

There are significant differences between tradi�onal wills (simple wills) and wills with a testamentary trust.

When using a simple will, the assets pass directly from the executor of the estate to the beneficiaries.

When using a testamentary trust, assets pass from the executor to the trustee of the trust. The trustee holds the assets for the benefit of the beneficiaries. It is the trustees’ responsibility to distribute the assets to the beneficiaries and he does this by following the rules laid out in the testamentary trust deed.

The will maker creates the rules of the testamentary trust. These are dra�ed by a solicitor and become the deed.

Beneficiaries do not own assets le� in the trust, they benefit from them.

The testamentary trust owns the assets. These assets are controlled by the trustee.

WHEN USING A TESTAMENTARY TRUST, ASSETS

PASS FROM THE EXECUTOR OF THE WILL TO THE

TRUSTEE OF THE TRUST.

THE TRUSTEE OF THE TRUST HOLDS THE

ASSETS FOR THE BENEFIT OF THE BENEFICIARIES.

Testamentary trusts provide powerful tax planning and asset protec�on tools for the beneficiaries named in the will.

Testamentary trusts provide flexibility. The clauses (rules) in a testamentary trust are wri�en specifically to suit the circumstances of the will maker. As long as the beneficiaries are named in the trust, the trustee can decide which beneficiaries will receive trust income. This means income, dividends and capital gains which can be distributed in a tax efficient manner.

Assets held in a testamentary trust are generally not taken into account in determining old age pension en�tlements.

Testamentary trusts can be used to protect valuable assets from family members who would be unable to handle a large inheritance.

The �tle to the trust’s assets are held by the trustee, rather than the beneficiaries. This allows assets to be protected as the result of any legal ac�on.

TESTAMENTARY TRUSTS

What is a testamentary trust? Advantages of using a Testamentary Trust

Testamentary TrustsThis guide offers a brief overview

of testamentary trusts.

Important

A beneficary named in a will may be going through a divorce.

If the assets had been le� as part of a standard will, then the assets would be up for grabs in the Family Court. However, if a testamentary trust had been established, the ex-partner would not be able to claim a share of the estate.

With a testamentary trust in place, the trustee of the trust controls the assets of the estate. The trustee protects the assets by holding them for the benefit of the beneficiaries.

If the will maker has adult children, one or more may not be in the posi�on to handle a large inheritance. It’s not uncommon to hear of people experiencing issues with gambling or addic�on. Inheritances can be blown in a short space of �me.

Using a testamentary trust means assets assets cannot be fri�ered away by beneficiaries. The assets are restricted because they are under control of the trustee.

TESTAMENTARY TRUSTS PROVIDE POWERFUL TAX PLANNING AND ASSET PROTECTION TOOLS FOR

BENEFICIARIES.

Testamentary trusts are generally bankruptcy proof. However, recent amendments to the Bankruptcy Act (inspired by some well documented and public bankruptcies), have made this a more complex area. Specific legal advice should be sought if you believe that this could be relevant to the circumstance of the will-maker.

There will be ongoing administra�on costs associated with using a testamentary trust. It’s common for an accountant or legal professional to be appointed as trustee of a trust, in which case they will need to be reimbursed. You should ensure this cost is agreed from the outset.

Annual tax returns will have to be prepared for the trust. This job should be assigned to an accountant.

ESTATE PLANNING

TESTAMENTARY TRUSTS

Testamentary TrustsThis guide offers a brief overview

of testamentary trusts.

Will maker (testatrix)

Beneficaries

Assets

Trustees

Executor

Why use a testamentary trust? PRACTICAL EXAMPLES

Marriage breakups

Disadvantages of using a testamentary trust

Financially irresponsible children

Any person over 18 years of age can be appointed as a trustee. A trust can have more than one trustee. The trustee will be the legal owner of the assets of the estate. The trustee will have the power to distribute capital and income to the beneficiaries. The trustee should be financially literate and they should be aware of the taxa�on obliga�ons of the deceased estate. A beneficiary can act as trustee of the trust. However, where a trust is being used for asset protec�on strategies, it may not be wise to have a beneficiary ac�ng as the sole trustee. It is good prac�ce to appoint an independent person to act as a second trustee. Decisions can then be made jointly.

The testamentary trust can be wri�en to include specific instruc�ons on using money to cover the living and educa�onal expenses of beneficiaries. Cash distribu�ons can be paid out to beneficiaries over �me in small amounts.

A property le� as part of an estate and covered by a testamentary trust would remain under the control of the trustee. A property or proper�es could be u�lized by any of the beneficiaries. However, because the property remains under the control of the trustee, it could not be sold. Likewise, creditors would not be able to make a claim on the property.

Se�ng up a testamentary trust in a will is a good op�on for people with young children who for obvious reasons would be unable to manage an inheritance. The trustee of a testamentary trust would manage theinheritance on the children’s behalf un�l an agreed age (minimum 18 years). Instruc�ons in the trust would

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If a will maker’s family group consists of young children, a guardian will need to be nominated to take care of them. Only a person with �me and capacity should be nominated as the guardian. This is o�en a family member; a parent or sibling of the deceased. The guardian and trustee will need to communicate with each other and should have a good working rela�onship.

include limita�ons on the type of investments which could be made. Specific clauses would also see resources of the will directed to pay living expenses, school fees, etc.

This helps to protect the beneficiaries’ long-term interests by avoiding conflicts of interest.

The trustee is appointed by a person called the "appointor" (or in some older deeds “the guardian”). The appointor is usually nominated in the schedule to the trust deed and is typically the person (or persons) who decides to set the trust up in the first place.

The appointor controls the trust, since if the trustee did not follow the appointor's direc�ons, the appointor would simply sack the trustee and appoint a more compliant trustee in its place.

TESTAMENTARY TRUSTS

This guide offers a brief overview of testamentary trusts.

Property One, two ormore trustees

WHO SHOULD BE A TRUSTEE?

WHO SHOULD BE AN APPOINTER?

WHO SHOULD BE A GUARDIAN?Children under 18

Gradually releasing assets

Testamentary Trusts

ESTATE PLANNING

As stated previously, a testamentary trust contains a set of rules, which in the event of death, will address the management of the estate. These rules are laid out in a deed which is prepared by a solicitor.

The trustee manages the estate by following instruc�ons laid out in the deed. This is done for the benefit of beneficiaries.

Testamentary discre�onary trust With a testamentary discre�onary trust, the will-maker gives the trustee the decision-making power. This flexibility allows the trustee to address the changing circumstances of the beneficiaries over �me.

More than one testamentary trust can be detailed in a will.

The testamentary trust can have one or more individuals ac�ng as trustee.

A company can act as trustee in which case the directors of the company will have control of the trust.

A beneficiary or beneficiaries can act as a trustee. Be aware, having a beneficary act as a sole trustee could leave assets exposed.

It is a good idea to install an independent trustee, someone with no affilia�on to the beneficaries. This person can be relied upon to make investment decisions with no conflicts of interest.

Testamentary trusts allow money to be released from the trust gradually to cover the living and educa�on expenses of beneficiaries.

Proper�es are controlled by the trustee(s) but can be lived in by beneficiaries.

With proper planning and a solid investment strategy, a testamentary trust is a sensible place to put any insurance or superannua�on payouts.

Income derived in the trust can be distributed to beneficiaries under 18 at usual adult marginal rates.

Annual tax returns will need to be prepared for the Trust. Administra�on costs should be factored in when deciding whether a testamentary trust is appropriate.

INSTALLING AN INDEPENDENT TRUSTEE ENSURES INVESTMENT DECISIONS CAN BE MADE FREE FROM CONFLICTS OF INTEREST

TESTAMENTARY TRUSTS

This guide offers a brief overview of testamentary trusts.

QUICK TIPS

If you are considering a Testamentary Trust, remember these points.

TESTAMENTARY TRUSTS AND DISCRETIONARY TRUSTS

Testamentary trust

Testamentary Trusts

ESTATE PLANNING

A family group consists of two parents (Jack and Sarah) with three younger children. They are in a healthy posi�on financially paying off both the family home and an investment property. They have a modest share por�olio and bank savings.

In the event of the death of either Jack or Sarah, their wills provide the estate will pass to a testamentary trust for the benefit of the remaining parent and the children. In this scenario, Jack dies suddenly, leaving Sarah to manage the mortgage and their three children on her own.

Sarah is joined by a close family friend, Anthony (who is an accountant by profession). Together they become executor and trustee of the estate and joint trustees of the testamentary trust.

With this arrangement in place, Sarah is able to assume day-to-day opera�on of the trust, accessing funds as required. Having Anthony installed as a joint trustee of the testamentary trust is a sensible move. It means Sarah is be�er protected so that if and when she enters into a new rela�onship, she will not be in sole control of the trust. With a second, independent trustee installed, there is less chance of Sarah being exposed or manipulated if the rela�onship doesn’t work out.

Jack's un�mely death has led to the estate receiving a significant amount of money from a life insurance policy and super benefits. In accordance with the rules of the trust, these funds are invested conserva�vely. Only property, blue chip shares (shares which have paid dividends for at least 5 of the last 10) and fixed interest deposits are invested in.

In the following years the income from these investments accrues steadily, where it is distributed to the children to cover their private school fees. Because this income is derived in a trust established on John’s death, income can be distributed to beneficiaries under 18 at usual adult marginal rates. This means there are now four taxpayers instead of just one to share the distribu�ons, resul�ng in a significant tax saving each year un�l the children reach 18.

A WILL WITH A TESTAMENTARY TRUST WILL BE CREATED WHEN ONE PARENT PASSES AWAY.

The family group consists of Jack, Sarah (parents) and their three young children. They are in a healthy financial posi�on.

JUNE 2017 SEPTEMBER 2017 SEPTEMBER 2017 AUGUST 2017 Jack tragically passes away leaving Sarah to manage three children, a mortgage and private school fees on her own.

In accordance with instruc�ons in the will, a testamentary trust is established.

Sarah is joined by close family friend, Anthony. Together they become executor and trustee of the estate, and joint trustees of the testamentary trust.

TESTAMENTARY TRUSTS

PRACTICAL ESTATE PLANNING SCENARIO 1

JUNE 2017 SEPTEMBER 2017 SEPTEMBER 2017 AUGUST 2017

PRACTICAL ESTATE PLANNING SCENARIO 1

JACK (DECEASED)(Husband of Sarah and father to three young children passes away suddenly a�er a short illness).

EXECUTORS & TRUSTEES OF THE WILLThe estate of Jack

As per the instruc�ons in the will, Sarah (widow) and Anthony (close family friend) become

executors and trustees of the estate of Jack.

TRUSTEESJack Family Estate TrustThe Testamentary Trust comes into existence on the death of Jack and as per the instruc�ons in the will,Sarah (widow) and Anthony (close family friend) become Trustees of the ‘Jack Family Estate Trust’.

PRIMARY BENEFICIARIES GENERAL BENEFICIARIESThe assets of the Testamentary Trust will be distributed to Sarah and the children.

Sarah Child 2Child 1 Child 3

Sarah

Sarah

Child 1

Child 2 Child 3

Sample assets of the estate

Anthony(Close family friend)

Related company

Sister

Brother

CharityNephewsNiece

Related trust

Jack(Husband of Sarah and recently deceased)

Sarah

Anthony(Close family friend)

Sarah

Anthony(Close family friend)

APPOINTORSJack Family Estate Trust

Sarah and Anthony become ‘Appointors’ of the Testamentary Trust. If Anthony dies, Sarah will

con�nue as the sole ‘Appointor’ and visa versa.

The Children of Sarah and Jack will all become appointors once they reach 18 years of age.

The assets of the Testamentary Trust will be distributed to other rela�ves

(grandchildren, nephews, nieces) related companies, related trusts

Sample assets of the estate

A WILL WITH A TESTAMENTARY TRUST WILL BE CREATED WHEN ONE PARENT PASSES AWAY.

TESTAMENTARY TRUSTS

APPOINTOR 1

APPOINTOR 2

As in the previous example, the family group consists of Jack, Sarah and their three children. However, in this example the children have now grown up, all three have good careers and are married with children of their own.

Jack and Sarah are now grandparents and are in a strong posi�on financially. They own the family home and have two investment proper�es. Their share por�olio has grown and they have a healthy balance in their savings account. Because their children are much older, Jack and Sarah decide to

simplify their wills so that when one dies, each of them will inherit the estate without the need for a testamentary trust. However a testamentary trust will be established when both are deceased.

Over a twelve month period Jack and Sarah both pass away from natural causes. Sarah dies first, and as per her will, Jack automa�cally inherits the estate. Eleven months later Jack dies too, whereby the whole estate passes to the testamentary trust.

Following the instruc�ons le� in the will, the adult children all become executors and trustees of the estate and joint trustees of the testamentary trust.

As well as the family home, the estate consists of two investment proper�es, blue chip shares and cash. Jack and Sarah both leave insurance policies and super payouts. In accordance with the wills, this money is first paid into their estates, and then into the testamentary trust.

The money is then invested conserva�vely in fixed interest deposits, property and shares.

This �me the income can be split 12 ways (the three children, their spouses and their children) so the poten�al tax savings are significant.

As well as being in control of the trust (trustees) all three siblings are beneficaries. Having three trustees means decisions involving the trust need to be made as a group. This provides a layer of protec�on. If one of the children’s marriages were to break down (as the sta�s�cs suggest one of them will), the other two siblings will be there to ensure the assets are not exposed to claims.

The family group consists of Jack, Sarah and their three adult children. They are in a healthy posi�on financially.

Sarah passes away leaving Jack to inherit her estate without the need of a testamentary trust.

Eleven months later Jack passes away too leaving the three adult children.

The whole estate now passes to a testamentary trust.

Following instrus�ons le� in the will, the adult children all become executors and trusteesof the estate and jointtrustees of the testamentary trust.

A WILL WITH A TESTAMENTARY TRUST WILL BE CREATED WHEN BOTH PARENTS PASS AWAY.

TESTAMENTARY TRUSTS

Jack and Sarah

3 x adult children

Jack (widower)

3 x adult children3 x adult children

TRUSTEE 3TRUSTEE 2

TRUSTEE 1

JUNE 2032 OCTOBER 2033 AUGUST 2032 NOVEMBER 2033 NOVEMBER 2033

JUNE 2032 OCTOBER 2033 NOVEMBER 2033 AUGUST 2032 NOVEMBER 2033

PRACTICAL ESTATE PLANNING SCENARIO 2

SARAH (Deceased)(Wife of Jack and mother to three adult children passes away).

TRUSTEESSarah & Jack Family Estate Trust

Sarah & Jack Family Estate Trust

The Testamentary Trust comes into existence on the death of Jack. The three adult children of

Sarah and Jack become Trustees of the ‘Sarah and Jack Family Estate Trust’.

APPOINTORS

The adult children of Sarah and Jack become ‘Appointors’ of the Testamentary Trust.

PRIMARY BENEFICIARIES GENERAL BENEFICIARIESThe assets of the Testamentary Trust will be distributed to three adult children.

Adult Child 1 Adult Child 2 Adult Child 3

Adult Child 1

Adult Child 2

Adult Child 3

Sample assets of the estate

Related company

Sister

Brother

CharityNephews / niecesGrandchildren

Related trust

JACK (Deceased)Jack passes away eleven months a�er a�er Sarah.

Adult child 1

Adult child 2

Adult child 3

THE ESTATE OF SARAHSarah’s estate automa�cally passes to her surviving husband Jack.

EXECUTORS & TRUSTEES OF THE WILLThe estate of Sarah and JackAs per the instruc�ons in the will, the three adult children of Sarah and Jack become executors and trustees of the estate of Sarah and Jack.

The assets of the Testamentary Trust will be distributed to other rela�ves

(grandchildren, nephews, nieces) related companies, related trusts

Sample assets of the estate

Adult child 1

Adult child 2

Adult child 3

TESTAMENTARY TRUSTS

PRACTICAL ESTATE PLANNING SCENARIO 2A WILL WITH A TESTAMENTARY TRUST WILL BE CREATED WHEN BOTH PARENTS PASS AWAY.

Adult child 1

Adult child 2

Adult child 3

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