What is a Testamentary Trust?

Testamentary Trusts in estate planning can deliver significant asset protection and tax benefits.  “Testamentary Trusts” are simply trusts established in your Will (a testamentary instrument).

It has been common practise for many years for simple testamentary trusts to be established in a Will, for example monies held on trust for infant children until they reach a certain age.

Testamentary Discretionary Trusts (TDT’s) are much more sophisticated (and longer of course), in that:

• A separate TDT can be established for each of your intended beneficiaries
• Each intended beneficiary is then placed in control of their own particular TDT, (which may only occur on them attaining a certain age)
• The beneficiaries of each TDT can be a potential broad category of people.

Example: You have three children and wish to create a TDT in your Will for each child.

Your Will provides that 1/3 of your estate is settled on each TDT. Each child (on attaining a certain age) could essentially take control of their own TDT.

The first advantage here is that the property is not owned by the child personally but by the trustee on trust for that TDT.

First Advantage – asset protection. Increasing this advantage is under treat and careful consideration needs to be given to who the controllers of the trust are. Each child has a broad group of people that they can choose to benefit from their TDT, including themselves, their spouse and their children.

Second Advantage – children are treated as adults for taxation purposes under this type of trust. Therefore income can be effectively split for potentially huge taxation benefits. Beneficiaries can be narrowly or broadly defined. It is usual that capital beneficiaries would only include your direct descendants.

Third Advantage – potential protection of parts of your estate for subsequent generations without being dragged into property settlement disputes on matrimonial breakdown.

If a TDT interests you as part of your estate plan, we recommend that you speak with one of our Estate Lawyers about this.

Tip: Unless Asset protection for a beneficiary is a driver this is usually only warranted for larger estates, in our experience estates with a net value of $500,000.00+ to be settled on each Testamentary Discretionary Trust.