Do I Need A Testamentary Trust?

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Do I Need A Testamentary Trust?

Written by: Karlene Wightman l Legal Team


Ever felt like getting your life in order was too hard and it would be easier to run away and join the circus?  Not knowing where to start, what to do or who to turn to when you’re ready to start ticking things off your life-to-do list?  We like to give you the facts, we’re not about sugarcoating situations or scenarios to try to make them sound better than what they are or what they could be.

Being prepared for the end of your life isn’t exactly an exciting time, but it is an extremely important part of life.  A Testamentary Trust is just one option that you can consider when you are preparing to speak to a lawyer about doing your Will if you are looking for extra protection for passing your assets onto your chosen beneficiaries.

What Is A Testamentary Trust?

A testamentary trust is a kind of trust that is established in a person’s Will and therefore does not come into play until the person’s death.  A testamentary trust holds the assets of the deceased person for the benefit of the beneficiaries.

Choosing Your Executor/Trustee

The usual process when making a Will is to first choose your Executor/Trustee (terms which are often used interchangeably).  The Executor/Trustee is the person who manages the Estate for the Will maker and distributes the assets in accordance with the Will maker’s direction.  The job of the Executor/Trustee ceases once the Estate is distributed to the beneficiaries.

An important thing to keep in mind when choosing an Executor/Trustee for a Will which creates a testamentary trust that the appointment is ongoing for the time that the testamentary trust remains in place (could be a period of 70 years).  Therefore, you need to consider:

  • Would the person want to have a continued role/responsibility to your Estate;
  • Are the Executors/Trustee young enough to be able to fulfil this role and/or have you selected backup Trustee/Executors?  This would be covered as part of your Estate/Succession Planning; and
  • Is it appropriate for the Trustee/Executors to be the same person/persons as the beneficiaries?  This very much depends on the purpose of establishing the testamentary trust.

How Does A Testamentary Trust Work

You are able to establish a separate testamentary trust for each of your beneficiaries if this is appropriate to your circumstances.  The testamentary trust is usually named after the particular beneficiary (the primary beneficiary), but the trust provides that the beneficiaries of the trust are actually broader than that.

The trust must be administered for the benefit, first and foremost, of the primary beneficiary, but distributions can also be made to spouses, children, grandchildren, siblings and other lineal descendants of the primary beneficiary unless we specifically excluded them.

When Is A Testamentary Trust Required or Recommended?

When deciding whether a testamentary trust is appropriate, the personal circumstances of the Will maker’s beneficiaries are just as important as the Will maker’s circumstances.  Some reasons why a Will maker would choose to create a testamentary trust include:

1. Waste + Dissipation by the Beneficiary

A common concern of a Will maker is that they have worked incredibly hard throughout their lives to build up their wealth, but unfortunately, their children do not have the same work ethic or are not mature enough to manage a large sum of money.  Putting the beneficiaries inheritance into a testamentary trust allows the money to be distributed in increments as opposed to the beneficiary receiving the money in one lump sum. In this case, it would be our recommendation to appoint an independent person or persons (we often like at least two) to be Executors/Trustees.

2. Blended Families

Blended families and second marriages can raise a number of concerns and issues regarding whether the Will maker’s inheritance will be passed down their family line.  Creating a testamentary trust, particularly for a spouse, means that the money is somewhat protected and the inheritance can ultimately go with the Will marker’s children once the spouse dies.

3. Potential Claims on the Beneficiary’s Assets Due to Marital Breakdown

A Will maker is sometimes concerned about the state of their own children’s marriages.  Their child may still be married but expressed concerns about the state of their relationship, or they could be going through a separation but have not finalised their property settlement or divorce.  In these cases, putting the inheritance into a testamentary trust offers some protection from a marital breakdown.  This is a complex area that we would need to discuss with you at the time.

4. Protection Against Bankruptcy or Claims Against A Business (if you are a Director)

If you are the director of a company, then any assets in your personal name will be subject to litigation if a lawsuit was brought against you.  If assets are in a testamentary trust, then those assets are generally not considered to be your asset and therefore cannot be subject to litigation.  Again, this is a complex area that requires a lot of thought and discussion, but something to keep in mind.

5. Intellectual or other Disability of the Beneficiary

There are circumstances where a Will maker has children or children with a disability, for example, an intellectual disability.  The Will maker’s primary concern in these circumstances is that their child would not be able to handle a substantial amount of money, or would be easily influenced to spend the money should they receive it.

Often children with an intellectual disability would not qualify for a Special Disability Trust (which we have previously discussed in other articles – see here).  In these cases, a testamentary trust can offer protection to the beneficiary.  Again, independent Executors/Trustees would be appointed to make decisions about when distributions are made from the trust and why.

What Is The Difference Between A Testamentary Trust + Other Trusts?

One of the advantages of a testamentary trust is that it offers a lot more flexibility than other trusts created in a Will.  The two main trusts that can be created are:

Fixed Trust

Simply put, this type of trust only allows the Executors/Trustees to distribute the interest earned on the lump sum invested to the beneficiary.  Some fixed trusts allow the Executor/Trustee to purchase a residence for the benefit of the beneficiary, but the terms of a fixed trust are generally very restrictive.

Special Disability Trust

Your child/spouse would need to have a severe disability to qualify for a special disability trust.  Furthermore, once funds are placed into a special disability trust the type of authorised expenditure is quite restrictive.  Even if your child/spouse does qualify for a special disability trust it still might not be the way to go.

Expert Legal Advice with Canny Legal

Testamentary trusts have a range of benefits to the Will maker and can be drafted in many different ways to suit your individual needs.  Depending on your reasons for creating the testamentary trust, you can also put a clause in your Will stating that the beneficiaries can choose to not establish a TDT.  Obviously, whether this clause is included will depend on the reasons for establishing the trust.

In general, we would always discuss a testamentary trust and whether it would suit your needs and provide greater protection than a ‘simple Will’.

Get in touch with our team to get the ball rolling on your Estate Planning today as it’s a part of life you can’t afford to put off.

Pictured, Special Counsel Karlene Wightman standing with one hand on her hip wearing a vibrant pink dress

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