7 types of people who should use a testamentary trust

As a typical lawyer, I have to include the usual disclaimer for this post that there are no hard and fast rules about using testamentary trusts, and every client circumstance needs to be considered individually.

However, as general rule of thumb, a testamentary trust should be of value for the following types of clients:

  1. People with children: especially when the children are minors.
  2. People contemplating children: Even if the willmakers currently has no children, but children are contemplated in the near future (for instance, a young couple thinking of starting a family), it can be a good idea to utilise a testamentary trust so that the willmakers do not have to come back and update their wills after a child is born – in my experience, it is common for clients to want to delay making a will until after a child is born, however once a new baby arrives, finding time to go back and update the estate planning documents is often the last thing they have time for!
  3. People who want to keep their inheritance in the family:  Where asset protection is important to the willmaker, a testamentary trust is a fantastic tool to create peace of mind that the inheritance will be retained by the recipient for lineal descendants and be protected against bankruptcy or family law actions.
  4. People who want to pay less tax (and let’s be honest, who doesn’t want to pay less tax?): See my previous post which explains the ability to distribute tax free amounts to minors and low income earners via testamentary trusts.
  5. People who have more than $350,000 to leave under their will:  Testamentary trusts start becoming useful where there are sufficient assets in the estate so that the tax savings and asset protection advantages justify the additional administration of a testamentary trust.  What do I mean by this? If the amount of assets that will ultimately end up in the testamentary trust are insignificant, the additional costs of the bank account, tax return and financial recordkeeping for the testamentary trust may outweigh the actual tax savings derived from streaming income to minors. When making this assessment, don’t forget to include life insurance and superannuation. As a very general rule of thumb, if there is around $350,000 worth of wealth that can pass into the testamentary trust on death, then it is usually worth incorporating one into the will.
  6. People who don’t trust their beneficiaries with money:  If the willmaker wants to ‘rule from the grave’ and protect recipients from their own spendthrift habits (even if its just until they reach a certain age), a testamentary trust can be a fantastic tool.  A key feature of a testamentary trust is the ability to separate control of the inheritance from the right to benefit from the inheritance, which allows the willmaker to nominate someone they trust to manage the inheritance for any beneficiaries who may not be financially mature enough to wisely manage the inheritance themselves.
  7. People who want to leave large sums to friends and family:  Finally, willmakers who do not have children may wish to utilise one or more testamentary trusts for gifts to friends or extended family members where the amounts are significant and those recipients would benefit from the asset protection and tax advantages.

While I have listed 7 of the most common scenarios where I see testamentary trusts as a powerful estate planning tool, the use of testamentary trusts is really only limited by your imagination and there are countless other circumstances where they can be of benefit to a willmaker. And don’t forget, you can always wind up a testamentary trust that later becomes redundant but it is extremely difficult to reverse engineer the outcomes of a testamentary trust after death if one wasn’t incorporated into the will.

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