Testamentary trusts

What is a testamentary trust?

“Testamentary” is a legal term that means the issue relates to the making of a will. A “trust” is where one person holds the legal title of property for the benefit of another person (not themselves). A “trustee” is the person who take the ownership in “trust” for another person (known as the “beneficiary”). Under the trust the trustee owes a legal financial duty to the beneficiary.

A testamentary trust is established under a will to appoint a trustee to use property for the benefit of the beneficiary in the way that the will specifies. Many people, especially those of wealth, create trusts to protect assets or to minimise tax. In the same way a trust can be set up under a will. These trusts can last for many decades following the date of death.

What it can achieve

Let’s take the example of a couple with a child who has an intellectual disability. They naturally worry what will happen to the child after their death. One of the ways to deal with the child’s financial security is to set up a testamentary trust. In this way the testator (the person making the will) can direct how the assets will be used after their death.

Another example might be where a parent is concerned about the marital situation of a child, and wants to ensure that only their child and not the child’s spouse inherits their wealth, or that the inheritance does not become subject to a claim under the Family Law Act.

Discretion of trustees

Under the trust the trustee can either be given specific instructions on how the money will be spent, or they can be given a discretion.

Often it is better to allow for a discretion because:

· it is the most flexible type of the trust;

· it may provide the best chance of the beneficiaries’ actual future needs being met;

· it may best allow for the best interests of the beneficiary to be met.

Choosing a trustee

This is a significant decision and should not be made without serious thought. The person you choose will have a lot of responsibility, and should have some financial management skills (or access to those skills).

You can choose:

· a private trustee company; or

· an individual.

Private trustee companies

Private trustee companies are regulated by law. The advantages of using these companies are:

· they are professional;

· they are independent;

· they are companies and therefore, unlike an individual trustee, can continue to act as trustee into the future.

The disadvantages are:

· the trustee will not have a personal relationship with the beneficiary;

· the company will charge.

It is possible to appoint an individual as a co-trustee with the company.

Individual Trustee

The main advantages of an individual trustee are:

· you can appoint someone with a personal relationship with the beneficiary;

· it may be cheaper.

The main disadvantages are:

· the individual may not have sufficient expertise;

· there can be a conflict of interest with the best interests of the beneficiary, especially if the trustee is a residuary beneficiary under the will.

Trustees duties

The trustee must take into account:

· the purpose of the trust;

· the needs of the beneficiary;

· prudent (not speculative) investments;

· the duration of the trust;

· the need to generate an income;

· the need to keep proper accounts.

Challenging a trust

It is possible for the beneficiary to challenge the decision making of the trustee, but this requires an action in court and should be first discussed with a solicitor.

LAW FOR YOU

Read this: This fact sheet is intended to be general information about the law in Australia. It is not a substitute for legal or other professional advice. Lawscape Communications Pty Ltd, Fairfax Interactive Pty Ltd or MoneyManager does not accept responsibility for loss to any person, who either acts or does not act because of this fact sheet.

Last Updated – March 2007

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