FAQs

Testamentary Trusts

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Q:

What is a testamentary trust?

A:

A testamentary trust is any trust created under a will and it only comes into existence on your death.

 

If you use a testamentary trust, instead of making gifts directly to a beneficiary, you make them to a testamentary trust that someone controls as the trustee of it.

 

That trust is normally like a family discretionary trust.

 

By making the gifts to a trust, it can be used to:
protect assets in the case of bankruptcy, marriage breakdown of a beneficiary and Family Provision Act claims against the estate of a surviving spouse who remarries or against the estate of a beneficiary
protect against the waste of assets
protect against betrayal by a surviving beneficiary who does not pass the assets on in the way that was previously agreed
protect assets and assist a person with a disability or other special need

If these are concerns, please ensure that you raise them, as they require special attention.

 

The trusts can be optional, so a gift can be taken either personally by the beneficiary for whom the gift is intended or through the trust. Other than in the case of bankruptcy, the option is not normally possible where a motive for setting it up is to offer one of the above protections.

 

Optional trusts permit flexibility in deciding which assets go into the trust and which do not.

 

It is often best to create a trust for each child.

 

In the case of a husband and wife, as the trustee, the survivor of them can control the trusts until the later death of both of them, when control can pass to each child for their own trust.

 

Until the death of both the husband and wife, the survivor of them, their children and their families would each be an eligible beneficiary of those trusts.

 

The trustee decides which eligible beneficiaries get any income or capital of the trust.

 

After the later death of both the husband and wife, subject to the wording of the trust, each child will control the trust assets that are set aside for each child and they can decide which beneficiaries of their trust will share in the income and capital of that trust.

 

Subject to any future tax changes, income on trust assets can be streamed tax effectively.

 

If you simply gift assets directly to your children for their use, the above protections cannot be achieved, tax effective income streaming is not possible and more tax will probably be paid as a result.