Testamentary trusts
Testamentary Trusts are a type of discretionary trust which involve the creation of an alternative entity to hold assets. Being testamentary, they differ from many other forms of discretionary trusts in that their creation is provided for while the testator is alive, but they only come into existence upon the death of the testator (hence the term “testamentary”).
Asset Protection
The creation of a testamentary trust forms part of your testamentary intentions and are documented in a will. Testamentary trusts have considerable value in regard to asset protection. In an increasingly litigious environment, testamentary trusts become a vehicle in which assets can be housed if, for some reason, the placement of those assets in the names of any particular beneficiary or beneficiaries may expose the inheritance assets to claims by third parties.
Threats to An inheritance
or estate
Bankruptcy Act 1966 (Cth)
Should any beneficiary of a deceased estate be in financial difficulties or be a bankrupt around the time in which an inheritance becomes available, the inheritance due to this party may be in serious peril, owing to the fact that the creditors involved will seek to have any debt owed by the beneficiary paid off by the inheritance from the deceased.
While this is due and legitimate recourse by said creditors, the deceased’s intentions may well have been otherwise.
Family Law Act 1975 (Cth)
Should a beneficiary of a deceased estate be in the midst of family law proceedings at the time in which an inheritance is in the process of coming available, family law legislation requires that the inheritance be noted in the family law asset pool of the parties involved and depending on various considerations as contained in the Family Law Act 1975 (Cth) and the circumstances and contributions of the parties to the marital pool, the inheritance may well become caught up in the family law matter of the beneficiary. Again, this is unlikely to have formed part of the deceased’s intentions for the estate.
State based legislation under Succession Act 2006 (NSW); Administration and Probate Act 1958 (VIC); and Succession Act 1981 (QLD).
The threat here may emanate from what is called family provision claims in certain circumstances. Please refer to the family provision tab on this website.
Issues with Beneficiary
Beneficiaries themselves may have certain attributes, within and outside of their control. A beneficiary may have a disability and be unable to care or make financial decisions for themselves; beneficiaries may be minors; or beneficiaries may exhibit certain behavourial tendencies, such as being spendthrift, be susceptible to problem gambling or substance abuse; and so on. A testator in these scenarios may well seek to establish mechanisms of control such that any inheritance is used responsibly and with the best interests of the beneficiary in mind.
Re-Partnering
A deceased may have views on whether a surviving beneficiary partner who subsequently re-partners and draws up a new will may ultimately see the deceased’s wealth go to the new partner or children of the new partner.
The deceased’s estate may therefore end up on a trajectory away from the initial family of the deceased. This is exactly what happened in the text-book case Banks v Goodfellow in the United Kingdom in 1870 discussed under the Wills & Legal Capacity tab on this website.
Taxation
Assets held in testamentary trusts may be distributed tax free to minors in the permitted quantums per annum. This represents opportunity to structure distribution earned in a trust in a tax efficient manner.
Please contact us to discuss your options as these documents are best to have in place, in the interests of contingency and forward planning, as well as prudence.
