Have you considered having a testamentary trust as part of your will? A testamentary trust is established under a will and that comes into effect once the will maker passes away. A testamentary trust (also known as a testamentary discretionary trust) can define and describe how your financial assets will be managed once you pass on and is managed by a trustee whom you appoint. You can choose to distribute your financial assets between many groups or beneficiaries and there is no set way to set out a trust; it can be written to suit your individual needs and wants.
There are two types of trusts; a discretionary or a protective. The discretionary trust gives a beneficiary an option to either take all or parts of their inheritance. The primary beneficiary can choose and manage the trustee and their inheritance within the trust. However in a protective trust, the beneficiaries receive their inheritance as per your instructions and do not have the power to change or appoint the trustee. The latter is the most common as it provides for more stability, less conflict and focuses on the pure management of one’s assets.
Benefits of a Testamentary Trust
There are many benefits and these include:
Flexibility
The Trustee may distribute the assets to the beneficiaries when they want. The trust provides flexibility to how and when the beneficiaries receive their inheritance.
Protection
For assets to be removed from the trust, the trustee must provide permission. Fortunately, the assets are not legally bound to the beneficiaries and that protects them from many situations. For example, if a beneficiary is to divorce from their partner, the assets in the trust are not considered assets of any of the individuals marital asset pool and the court system cannot order to how they will be distributed.
Also, if a beneficiary is at risk of going bankrupt or is in a high risk profession in which negligence claims are common or expected, the trust provides an opportunity to protect the inheritance. The testamentary trust can not be contested in a will challenge, because only the beneficiaries will receive the assets and anyone not listed as beneficiaries are not entitled to anything.
Taxation
The trustee can choose how to distribute income from the trust’s assets from year to year. This enables the trustee to take advantage of the lower marginal rates of tax of one or more potential beneficiaries. Minors listed as beneficiaries can also receive their inheritance tax free if it is under $6000 and they have no other direct source of income.
Protecting the beneficiaries from themselves
For some people, receiving a lump sum inheritance is overwhelming or too tempting. Sometimes a beneficiary might suffer from an addiction issue. With a testamentary trust, you can choose to withhold the money until they reach a certain age or can slowly provide them their inheritance with small payments over a long period of time. You can also withhold the money for certain events, for example; the purchase of their first house, university funds or money towards healthcare. Whatever method you choose, it is completely up to you.
Control over beneficiaries
You may choose to put your spouse as your trustee, however, may also wish for your children to receive some of your income. In this case, by setting up a testamentary trust, you can provide assets to pass on to your children. Therefore, it can be ensured that your children will receive something after you pass away and can have a say in how your finances are dispersed. However, if you do not wish for your children to receive assets, you can clearly state who you wish for your beneficiaries to be and how you want your assets dispersed.
Who can be a Trustee of a Testamentary Trust?
A trustee can be anyone you wish to be in charge. Examples include executors of the will, your spouse or anyone of your relatives you trust enough to be in charge of your trust. It is recommended you know the trustee and have a deep level of trust with the person. They should know your wishes and wants for how your assets will be dispersed. If you do not believe one person will do an adequate job, you can have multiple trusts and a different trustee for each.
What should be considered before establishing a trust?
Maintaining a trust includes expenses, with an example including accountancy fees for tax. You must also decide whether the income of your estate is enough for a testamentary trust and who you believe should be your beneficiaries. It is recommended that you have a clear idea on what you want to be done with your assets and who you wish to receive them. Perhaps discuss your intentions with another person to discover what is best for you and your estate.
A testamentary trust can be very beneficial and gives you greater control, flexibility and protection than an ordinary will might. Because they can be complex, it’s important to see an Accredited Specialist in Succession Law (wills and estates) to guide you through the process.
Contact us today to find out more – we offer a FREE, 10-minute phone consultation – and every client receives the benefit of an Accredited Specialist’s advice.