What is a testamentary trust and does my Will need one?

With a fourfold increase in the total amount of inheritances passed onto the next generation predicted to occur in Australia between 2020 and 2050, it makes sense to give some thought to how you would like your personal and business assets distributed after your death.

This huge transfer of wealth between generations makes it more important than ever to devote time to establishing a well thought-out estate plan. The alternative could be your beneficiaries paying more tax than necessary and your assets not ending up with the people you want.

Obviously, your Will plays an important role in transferring wealth but an often-overlooked tool is a testamentary trust.

This type of trust is established as part of the Will-making process and it can offer lots of useful options to protect your assets. It can also provide flexibility in how and when your assets – and the income generated from them – are distributed to your chosen beneficiaries.

Your Will: Standard vs testamentary trust Will (TTW)

A standard Will is the very minimum everyone should have in place prior to their death. A standard Will prevents your family and friends being left with the emotional stress and potential hardship of you dying intestate (with no valid Will in place).

If you die intestate, the Supreme Court in your state appoints a suitable administrator to wind up your affairs. This usually involves arranging your funeral, collecting your assets and distributing them to your family after paying tax and any debts you leave behind.

In its simplest form, a standard Will outlines the person or persons you want as executors for your estate, who your chosen beneficiaries are, and your instructions for the distribution of your estate.

Standard Wills do not offer any protection for your assets from former spouses, creditors, business associates or disgruntled beneficiaries, or provide any opportunities to minimise the potential tax payable on your assets.

A testamentary trust Will (TTW) on the other hand, is a type of Will that establishes a trust (or trusts) to hold your assets after you die.

How does a testamentary trust Will work?