Testamentary trusts are created by a will to provide a greater level of control over the distribution of assets to beneficiaries. There are also tax advantages available through testamentary trusts, making them an effective estate planning tool.

Why would I use a Testamentary Trust?

A testamentary trust can be used to make sure an inheritance reaches the intended recipients. These trusts provide benefits such as asset protection (for example to protect a beneficiary who is prone to potential liabilities or matrimonial disputes) and tax concessions. Properly drafted, testamentary trusts can also guard against the divisive result of divorce, and ensure that in the event of remarriage, assets will be passed on to the children or grandchildren of the Will maker.

A testamentary trust can also be used guarantee that vulnerable beneficiaries, such as very young children or the ill, or disabled, will be provided for.
Testamentary trusts may also be a wise precaution if the beneficiaries are likely to face legal action or bankruptcy, such as those in professions frequently subject to litigation, or high-risk business. This form of protection is often referred to as Asset Protection.

Can a Will-Maker Restrict the Terms of a Testamentary Trust?

The terms of testamentary trusts are contained in the Will. Terms in the Will can include restrictions on any or all of the beneficiaries or conversely, grant them extensive control. Such terms effectively enable the Will maker to rule from the grave. It is up to the Will maker whether they vest control in the beneficiaries or in the hands of an independent trustee.

Giving control to the beneficiaries allows a greater degree of flexibility; but a managerial trustee may be better if the beneficiaries are not able to control their own finances.

How do Testamentary Trusts Work?

Testamentary trusts are drafted to mimic the operation of a discretionary trust such as a family trust: the testamentary trust will have a broad range of discretionary beneficiaries, usually the members of an extended family. The trustee of the testamentary trust selects from the class of beneficiaries which person or people who will receive a gift of trust income or trust capital. Until the trustee elects to distribute to a beneficiary, no person has a vested interest in the assets of the trust.

Disadvantages of a testamentary trust

The main disadvantage of a testamentary trust is that if the trust restricts access to capital or income, a beneficiary may become upset and challenge the terms of the Will. The possibility of a challenge may be reduced by the Will maker communicating their intentions to their beneficiaries at the time that they prepare their Will.

When setting up a testamentary trust the terms are extremely important. You should also consider administration costs, capital gains tax, pension eligibility and estate planning.

If you would like to speak with someone about your Will and the effectiveness of a Testamentary Trusts for your circumstances, please get in touch with Iain Gardiner, principle partner at Dawson & Gardener Solicitors. Phone: 02 4954 8666.