What is a Testamentary Trust and Why Should I Consider One?

Testamentary Trust

An unavoidable fact of life is that, someday, we all die. While many avoid thinking about this particular reality, it doesn’t change the fact of the matter and by putting off issues around death entirely, many place themselves or their loved ones in a position of risk when the time finally does come. One way to protect yourself, your estate, and your family is to tackle these issues head on and engage in various types of estate planning. By going beyond just executing a will, you will be able to provide yourself and your family peace of mind when the inevitable does finally come to pass. For additional benefits, consider a testamentary trust.

A Trust Is: First, it might be helpful to know what a trust is. A trust is a legal arrangement between three parties. The first party (the trustor) transfers property (assets) to a second party (the trustee), who holds these assets for the benefit of the third party (the beneficiary).

A Testamentary Trust is: A testamentary trust is a trust that is created through a will and only comes into effect after the death of the person who created the will (the testator). In short, when the testator dies, the assets will go into the trust rather than be distributed through the will. The reason that these assets are not considered to be part of the estate as defined by the will is that the trustees are not beneficiaries of the estate and do not control asset distribution.

Benefits to a Testamentary Trust

Tax implications: Trustees of a testamentary trust will have the discretion to distribute and divide the capital gains of the trust however they choose in order to minimize the tax implications on the beneficiaries. On the other hand, if a beneficiary inherits directly, they will be forced to pay taxes on that income based on their personal marginal tax rate.

Asset protection: Due to the fact that the trust assets are not considered part of the deceased’s estate, these assets will be protected from the claims of third parties, such as creditors or ex-spouses. Similarly, if a beneficiary is involved in a property settlement, the assets will not be accessible as they technically belong to the Testamentary Trust and not to the beneficiary themselves.

Types of Testamentary Trusts: There are two common types of testamentary trusts.

Discretionary Testamentary Trusts: This is when the executor grants the beneficiary themselves the option to place all or part of their inheritance into a testamentary trust. In this scenario, the named primary beneficiary has the ability to appoint or remove a trustee as they see fit and are even allowed to manage their inheritance within the confines of the trust. This is more common with competent adult children or spouses.

Protective Testamentary Trusts: This occurs when the executor does not allow the beneficiary to choose and the beneficiary is forced to take their inheritance via testamentary trust. Additionally, the beneficiary will not have the power to appoint or remove trustees. This is more common when the beneficiary needs guidance due to age, responsibility, or disability.

Including a testamentary trust as a part of your estate plan may be a good idea for a lot of reasons, many of which have been outlined here. However, if you or someone you love has any questions about planning ahead for the financial wellbeing of their estate, contact an experienced lawyer today and receive personalised guidance.