Testamentary Trusts: Do you need one?

A Testamentary Trust (TT) is an express Trust created under a will and only comes into effect when the will maker dies, and the property settles on the Trust.

The will maker declares property subject to the Trust which can include superannuation benefits and life insurance proceeds.

The trust can be fixed or discretionary as to payment of income or capital or establish a life interest and is available to a wide range of beneficiaries.

The basic elements which must be present for a Trust estate to exist are:

• Trust property, and at least one Trustee who holds the legal title to the Trust property and Beneficiaries for whom the Trust assets are held.
• The Trustee must be under a personal obligation to deal with the Trust property for the benefit of those beneficiaries.
• There must also be certainty in relation to the intention to the Trust, the subject matter of the Trust, (the property) and the objects (beneficiaries) for the Trust to be valid; and the will must be valid.

Everyone’s financial and personal affairs are far more complex these days with prior relationships, children from those relationships and assets held in family trusts and super funds.

The main reasons to incorporate a TT in your will are:

1. You have significant assets and wealth accumulated which you do not want exposed to risk of being dissipated on your death.
2. You have infant children or adult children with a disability
3. A child may end up in a bad relationship, and the assets are then open to attack by the partner or spouse in the Family Court.
4. A child goes into a business that fails and is sued by creditors personally; or
5. A child may be easily influenced or unable to manage their affairs.
6. Some children simply have poor judgment if they inherit substantial wealth and parents don’t want to see that wealth accumulated over their lifetime, given away or spent without some controls and measures in place.

A Testamentary trust controls those risks by the fund being put into a trust, via the will rather than going directly into the hands of the children.

It can also provide tax benefits, enable income splitting, while allow the beneficiary to access income or capital as they need.

We recommend having a separate Trust for each child rather than one Trust for several children as having one trust limits flexibility and may cause dispute between the kids if one child has different needs or a different risk profile to the other. They may also disagree where to invest the funds, or one beneficiary wants to wind up the Trust earlier than the others. One trust requires income to be distributed equally to avoid dispute.

With significant farming business operations or investments or a family with large wealth a head Testamentary Trust could be set up to hold the assets, then each child has their own individual Trust for their own family which then protects the farm and keeps the property for generations to come.

The Trustee can be a natural person, company or professional Trustee and it is sensible to have the child (if of legal age and competent) as a co-Trustee with a family professional advisor such as lawyer and/or accountant.

If the primary beneficiary (child) is bankrupt or faces a marital breakdown the Trust terms should provide that they must resign as Trustee and the Appointor (the person who controls the Trust) can then be a sibling or non-family member such as the family accountant or family solicitor.

It should be optional as it then also allows a beneficiary to take a part of their inheritance directly (if required) to pay debts, buy a home or make immediate use of funds.

Where there are significant non cash assets such as a farming property or business the trust terms should be broad.

If, however it is to look after young children or a spouse with a major asset like life insurance a simpler Testamentary Trust deed could be used but each Trust needs to be carefully tailored to their circumstances.

Under trust law Trustees are not given the power to carry on a business on a continuing basis and a power to vary and amend the Trust is important, otherwise approval must be obtained from the Supreme Court which is expensive.

If a principal residence is gifted and held in a Trust even with a right of occupation to a beneficiary, it will not relieve it from land tax.

In New South Wales after 2 years from the date of death of the Testator, Land Tax applies even with a right to residency in the Will, so you need to check as State laws vary.

There are exemptions where property is transferred from a Trust to a beneficiary (again this does vary between State laws).

A deceased spouse can gift the principal residence to a Trust and avoid stamp duty but then when the home is transferred out from the Trust to the surviving spouse stamp duty is payable again this varies from State to state.

You may want to assist your children or grandchildren purchase their first home, in which case the distribution should be by way of a loan to them properly documented to the child so that if the child becomes bankrupt or is involved in family law proceedings, the trustee can ask for the loan to be repaid.

Once family law proceedings are over or the bankruptcy finalised there can be another loan made to the child at that time.

This strategy can also be used for capital distributions for a risky purpose such as a child starting up a new business venture or investment. The Trustees should consider whether to take security over the beneficiary’s assets.

Trustees must maintain proper records of trust distributions especially in relation to distributions to minors where the parents of a minor receive the income and use the income to meet family expenses, otherwise the minor could bring legal action for breach of Trust.

We recommend 25 years as the age at which a child can take control of the Trust as the primary beneficiary and in some cases, it may be older or even a staged release of funds between 25 and 30.

Once a child is 18, they can apply to the court to access all of the capital in the Trust however that is unlikely if the child is the primary beneficiary of the Trust.

Where children have issues with drugs, money-management are easily influenced or have a mental or physical disability capital protected Testamentary Trusts or Capital Reserved Testamentary Trusts may be better as they are mandatory not optional trusts and restrict access to capital by the protected beneficiary.

The Trustee can only release capital for medical emergencies or their education. In some circumstances the Trustee can be given a power to pass control of the Trust to the protected beneficiary once they recover from their addiction or meet other specific criteria.

SMSF members should check their funds Trust Deed to check their BDBN nomination.

Without a BDBN the Trustee has an unfettered discretion to determine who to distribute to and in what proportion.

A non-binding standard (“Death Benefit Nomination”) or discretionary nomination is suitable where a sole beneficiary, usually the spouse, who is also a co-Trustee will benefit.

The nomination is not binding on the Trustee who retains control of the distribution.

A Binding Death Benefit Nomination (“BDBN”) gives the member the ability to direct the Trustee to who and what proportion the benefits are to be paid.

It is binding on the Trustee and provides maximum control and comfort for the member.

Most public industry funds require the BDBN to be renewed every three years although there is a right to do a non-lapsing BDBN.

The days of making a simple will are gone due to the complexity of how assets are held by clients.

Many clients now own their own home, an investment property, a business in a company or trust and have funds with an Industry super fund or SMSF.

There may also be children from prior relationships and current partners to consider and balance their needs all of which can be stressful to say the least!

It is important to set aside time from your busy work commitments to do your estate planning.

We find it is also a huge relief to clients once it is done and it can be reviewed if there is a change in your circumstances once every few years.

Estate planning is often considered in conjunction with business succession planning, so it is important to get specialist advice from your lawyer, accountant and financial planner.

It is all about ensuring your wishes are met, your loved ones are protected and avoiding dispute between family members after you are gone!

Robert Toth I Special Counsel I Accredited Commercial & Franchise Law Specialist robert@sanickilawyers.com.au | Mobile 0412 673 757