Testamentary Trust Defined:
- Testamentary trust a discretionary trust established under a Will. It does not come into effect until after the person (ie: the testator) die.
- Usually a person makes a Testamentary Trust when the beneficiary is still a minor or the testator does not want the minor to receive the entitlement until a certain age. It might not be a good idea to allow children to inherit all assets at an early age because they might become unmotivated to work hard, or if the money is spent unwisely, they might lose all the inheritance at once. To mitigate this, a testamentary trust provides a high level of control and flexibility as to when your children inherit a specific asset and for what purpose. For example, it is possible to stagger the release of your assets over a period of time (eg: when your children reach 21, 30, 35 etc.), or to tie the release of your assets to a particular event or use (eg: buying of a house, marriage, starting a business etc,).
Who can be a Trustee?
- Anyone you find reliable and credible can be the trustee of your Testamentary Trust.
What are the Benefits of a Testamentary Trust?
- More flexibility
Under testamentary trust, the Trustee has effective control of the Trust and can exercise discretion to distribute capital and income of the assets between the nominated beneficiaries as long as it conforms with the Testator’s wishes.
- Asset protection
As the trustee holds the title to the trust’s assets, this offers better asset protection against potential litigation, bankruptcy or other legal actions. Besides, a testamentary trust usually does not only include one beneficiary – rather a range of potential beneficiaries, which can be structured in a way to include a potentially disgruntled beneficiary. As such, it becomes more difficult for the disgruntled beneficiary to bring a claim against the estate until the trust has been fully administered.
- Tax planning benefits
Testamentary trusts allow trustees to distribute and split the income of the trust to achieve the most tax efficient outcome.
What to consider before establishing a Testamentary Trust?
There will be ongoing administrative costs involved in maintaining a Testamentary Trust. Factors that you should consider include whether the income generated by your estate will be sufficient to warrant a Testamentary Trust, whether you have sufficient assets in your estate and whether any of the above concerns apply to you or your intended beneficiaries.
