Estate planning for couples: When should a testamentary trust start?
One question that comes up for nearly every estate plan involving a couple is when should the testamentary trust start.
While it may be obvious, it is worth clarifying that a testamentary trust only starts when somebody has died. After all, the phrase ‘testamentary trust’ is just fancy lawyer speak for a trust that is established in a will. In fact, I don’t know why they aren’t simply called ‘will trusts’. Perhaps the name was invented back when lawyers used to charge by the letter? (Now don’t get me started on how lawyers charge – that’s a topic for another post!). And while it is possible to create a trust during a person’s lifetime to receive an inheritance, that’s also a topic for another day. In the interests of keeping things simple, I will refer to testamentary trusts as TTs.
Let’s get down to the critical question: Should the TT commence on the death of the first spouse, or after they have both died?
As always, there are no fixed rules about this, however, the following guidelines explain some of the factors to consider when determining when the TT should start.
TT should commence only after both spouses have died where:
- Majority of assets are held as joint tenants or in superannuation i.e. there are few estate assets on the death of the first spouse
- No grandchildren or minors in the family i.e. there is no benefit in accessing excepted trust income treatment
- Neither spouse is in a high-risk occupation and does not require the asset protection advantages
- No need to restrict the surviving spouse’s control over the inheritance e.g. the surviving spouse can have autonomy over the inheritance and there is no need to ‘rule from the grave’ due to blended family or other trust issues
- The intention is to establish multiple TTs after they have both passed away, and the surviving spouse wants simplicity without managing multiple TTs during their lifetime
TT should commence on death of the first spouse where:
- If clients are a young couple with minor children
- If an older couple with adult children, TT should come into operation in first instance where:
- Significant assets will pass into the TT on death of first spouse
- There are grandchildren where it would be useful to stream excepted trust income to from the TT
- Asset protection is important to the surviving spouse e.g. the surviving spouse is in a high-risk occupation
- They don’t want the assets to ultimately pass under the surviving spouse’s will e.g. there is a blended family or other trust related issues
Finally, if the TT comes into operation on the death of the first spouse, it is prudent for the surviving spouse to revisit their estate plan and make any necessary changes to their own will to factor in the change of circumstances. The main changes would include updating financial control roles and diverting their assets into the TT which has now been established.
However, if both spouses die in quick succession or the survivor does not prioritise the review of their will (which is often the case given the significant life changing event), it is common for the wills to include a clause avoiding duplication of the TTs and allowing the assets of the last surviving spouse to pass into the TT established on the death of the first spouse.