Testamentary Trusts

A testamentary trust is a trust created by a Will.  It is generally a discretionary trust, i.e. the trustee of the trust will have full discretion about who benefits, and to what extent, under the trust. 
This outline is to give you an overview of the common features and advantages of testamentary trusts.  There are different forms of testamentary trusts to suit particular circumstances, but this overview is only about the general type of testamentary trust, not all the possible varieties of them.
A testamentary trust has two significant advantages for a Will maker and the nominated beneficiaries:

  • Significant taxation advantages in terms of income splitting; and
  • Protection of the assets of your estate against the risk of claims arising from financial or other difficulties that can affect the estate beneficiaries.

Income splitting

The following significant tax advantages for testamentary trusts are available under current Australian tax laws:

  • Section 102AG of the Income Tax Assessment Act 1936 (incorporated in the 1997 Tax Act) removes the punitive tax rates on unearned income (interest, investment dividends, etc) for children and allows ordinary tax rates to apply where the income is distributed from a trust estate created under a person’s Will.  See the worked example in the attachment for an explanation of how this works in practice.
  • By using a discretionary testamentary trust, any income gains, capital gains and franked dividends earned from the estate assets after you die can be distributed among family beneficiaries each year in the most tax-efficient way.

The tax concessions do not only apply to income and capital gains earned by the trust from inherited assets. They also apply to any income and capital gains earned from assets or wealth acquired from the reinvestment of moneys received from the original inherited assets.

A Will can establish more than one testamentary trust.  If there is more than one beneficiary, your Will can (and indeed should) establish a separate testamentary trust for each beneficiary.

Asset protection

Generally, people should be concerned about protecting their assets and taking measures to ensure that the assets remain within the family and are used to benefit family members (particularly beneficiaries in higher risk categories, such as company directors or professionals).

In particular, people should be concerned about:

  • their beneficiaries becoming bankrupt, especially those that are involved in highly leveraged businesses;
  • their beneficiaries becoming divorced and their assets being split in the divorce or de facto relationship breakdown;
  • their children mismanaging or wasting their inheritance;
  • ensuring that the surviving spouse will pass on their assets to their children upon that person's death; or
  • looking after handicapped children.

The significant advantage of a testamentary trust is that the assets are owned by one person(s) (the trustee) and the benefit of the income and capital of the trust passes to other persons (the beneficiaries).
By separating the aspects of control and benefit in this way, testamentary trusts can protect assets from legal action involving the beneficiaries and/or the misuse of those assets.

The terms of the testamentary trust are contained within and set out in the Will. These terms can restrict the ability of any of the beneficiaries to control the activities and investments of the trust or give them complete control.

As noted at the outset, testamentary trusts are generally fully discretionary trusts, so that the trustee has the discretion to decide which beneficiaries to distribute to in any given year and what to be distributed.  This permits flexibility and maximizes tax planning opportunities for managing the inherited wealth, with the help of appropriate professional tax advice.

The only way that you can ensure that the assets are fully protected is to have at least two trustees, an independent trustee together with the primary beneficiary.

You therefore need to decide whether you want to sacrifice the independence of the beneficiary to ensure that the inherited assets are protected and used sensibly for the benefit of the primary beneficiary and their family. If beneficiaries have full control of their testamentary trusts, this allows the beneficiaries to use the trusts for income splitting and asset protection.

However, if you want to ensure that your assets are invested and managed for the benefit of their beneficiaries then it is appropriate to have an independent person in control of the testamentary trust. This should only be done after careful consideration of the implications.  It is also appropriate to have an independent trustee for testamentary trusts established for vulnerable beneficiaries (e.g. those with a significant disability, illness or addiction problems).

To see an example of how this works in practice, see Comparison Between a Simple Will & Testamentary Trust.

For further information, please contact Craddock Murray Neumann Lawyers on 02 8268 4000.

Testamentary Freedom Can Be Restricted by Contract
Date: Nov 19, 2014

It is well settled that a person can, by contract, restrict his or her testamentary freedom. This can be done in several ways.

Will maker can make no provision made for adult children
Date: Aug 20, 2014

It is clear from decided court cases that the Court accepts that willmakers are in certain circumstances entitled to make no provision for children, particularly in the case of children who treat their parent , the willmaker, callously, by withholding without proper justification their support and love for them in their declining years. Even more so when that callousness is compounded by hostility.

Caveats in Probate Proceedings
Date: Jul 24, 2014

The function of a caveat in probate proceedings is to obtain a stay of proceedings seeking probate, administration or resealing except upon notice to the caveator, i.e. the person who lodges the caveat.

Executors and Administrators living outside Australia
Date: Jun 23, 2014

Generally, the Supreme Court of New South Wales will not grant probate or letters of administration to an applicant living outside of Australia.

Capacity to make a will
Date: Jun 20, 2014

In order to make a will a person must have sufficient mental capacity. If a person does not have the required mental capacity their will may be found to be invalid.

The Problem With Internet Wills
Date: Jun 18, 2014

The Law Society Council has issued a statement on wills practice to address concerns with developments in internet will drafting and the potential for problems of identification, verification and assurance that a willmaker is giving direct instructions free of influence or coercion by relatives, carers, or other third parties.

Changes to Forms: Powers of Attorneys
Date: Jun 16, 2014

The power of attorney is an important and powerful legal tool. It allows you to appoint a trusted person to act on your behalf in relation to your legal and financial affairs when you are temporarily or permanently incapacitated. Some recent changes to the forms used to appoint a power of attorney clarify certain aspects of the process of appointment.

What are Powers of Attorney?
Date: Jun 16, 2014

A power of attorney is a legal document where you, as the ‘principal’, appoint another person your attorney to control and make decisions on your behalf regarding your legal and financial activities which could include dealing with your money, bank accounts, real estate, shares or other assets. If you want your attorney to deal with real estate, the power of attorney must be registered with the Land and Property Information Office.

Applications For a Grant of Probate or Letters of Administration on Presumption of Death
Date: Dec 17, 2013

An Application for a Grant of either Probate or Letters of Administration on presumption of death occurs in every case where the deceased’s body cannot be found. This is the case even though a Certificate of Death may have issued.

What is a “Benjamin Order”?
Date: Oct 04, 2013

An issue sometimes facing a plaintiff is establishing the identity or whereabouts of persons to whom the deceased’s estate or part of the estate should be distributed and the inability, despite adducing all available evidence, of ruling out the possibility that a person exists or that person had descendants who might still be alive.

How do I keep my will safe after I have made it?
Date: Sep 04, 2013

There are several ways that a testator (the person who is making the will) can store her/his will and/or information about her/his will.

Will my will still be recognised by NSW law if I make it outside NSW?
Date: Jul 05, 2013

You may have made a will or be considering the possibility of making a will outside NSW. The relevant legislation deals with this situation.

TIME LIMIT (FROM DATE OF DEATH) FOR MAKING A FAMILY PROVISION CLAIM
Date: Jul 03, 2013

Section 58(2) of the Succession Act 2006 requires an application for a Family Provision Order to be made not later than 12 months from the date of death of the deceased person unless the court otherwise orders “on sufficient cause being shown”.

Does a solicitor taking instructions to draw a will owe a duty of care to beneficiaries
Date: May 09, 2013

It is settled law that a solicitor retained to draw a will and ensure that the will drawn up takes effect in accordance with its terms owes a duty of care to an intended beneficiary under the will. That duty gives rise to a duty to exercise reasonable care and skill in performance of those tasks – High Court decision of Hill v Van Erp 1977 HCA 9.

THE DOCTRINE OF “SUSPICIOUS CIRCUMSTANCES” IN PROBATE CASES
Date: Mar 26, 2013

The doctrine of suspicious circumstances was explained in the case of Vernon v Watson (2002) NSWSC.

UNDUE INFLUENCE - CAPACITY TO MAKE A WILL – TESTAMENTARY CAPACITY
Date: Mar 25, 2013

It is often said that concepts of testamentary capacity and knowledge and approval of a will are distinct, and that the issue of knowledge and approval only arises once it is found that a willmaker has testamentary capacity.

TESTAMENTARY CAPACITY AND THE APPOINTMENT OF THE NSW TRUSTEE & GUARDIAN
Date: Mar 14, 2013

The making of an Order appointing the NSW Trustee & Guardian the manager of a person’s estate does not in all circumstances lead to the conclusion that the managed person lacks testamentary capacity during the currency of the order.

What is the effect of marriage on a will?
Date: Mar 13, 2013

There are a number of times in your life when you should review your will to make sure that it will give effect to your intentions in relation to your property and estate.

Life changes and wills
Date: Mar 12, 2013

Did you know that your will actually becomes invalid once you marry? Only in special circumstances does its validity continue after you marry.

Estate planning for unforeseen circumstances
Date: Mar 11, 2013

The importance of estate planning is most clearly seen when unforseen circumstances occur.

WHAT HAPPENS WHEN A BENEFICIARY WITNESSES A WILL?
Date: Mar 08, 2013

Section 10 of the Succession Act 2006 appears under the heading “Can An Interested Witness Benefit From A Disposition Under A Will?”

WHAT IS TESTAMENTARY CAPACITY – CAPACITY TO MAKE A WILL?
Date: Mar 07, 2013

To make a valid will a person must have testamentary capacity which is described as being “... of sound disposing mind when the will is made and there must be no coercion which overpowers the volition of the testator” – Hall v Hall (1868).

TESTAMENTARY CAPACITY – CAPACITY TO MAKE A WILL – WHAT DOES THE COURT CONSIDER?
Date: Mar 05, 2013

The approach to the issue of determining testamentary capacity has changed little since the 1924 decision of Bailey in which the following principles were set out.

WHAT IS UNDUE INFLUENCE IN PROBATE?
Date: Mar 03, 2013

Undue influence in probate is different from the equitable doctrine of undue influence.

Can a Minor Make a Will or Revoke a Will?
Date: Feb 28, 2013

A minor is the legal description of a person under the age of 18 years. As a general rule a minor cannot make a will.

Considering debt with estate planning
Date: Feb 13, 2013

Debts do not just disappear when you die. Effective estate planning includes ensuring you are debt free when you die or alternatively leaving enough money behind so that your family are not left dealing with your debts.

Who can apply for Letters of Administration?
Date: Nov 18, 2012

When a person dies without a will institutions such as banks, insurance companies and superannuation funds will often require someone to be granted Letters of Administration before funds of the deceased are released.

Gambling away inheritance?
Date: Jun 18, 2012

Lucy, Kate and Mark are concerned that if Rebecca dies before Ronald, he will gamble the estate away and Ronald will become financially dependent on them and/or will incur gambling debts that he will not be able to repay.

Time limits on Making a Family Provision claim
Date: May 30, 2012

A claimant has 12 months from the date of the deceased’s death to bring a claim for provision from the deceased’s estate. Under s58(2) of the Succession Act 2006 (NSW) the court may extend the time limitation where the claimant can show ‘sufficient cause’.

What happens if I leave a gift in my Will that no longer exists when I die?
Date: May 20, 2012

John and Mavis were married. John had one daughter Edwina. In 2001 John made a Will leaving his house to Mavis and the residue of his estate to Edwina. In 2005 John sold the house. John died after the house was sold.

Choosing your executor
Date: May 09, 2012

When making your Will one of the key decisions you must make is who to appoint as your executor.

8 reasons to have a lawyer draft your will
Date: Apr 30, 2012

With easy access to cheap and even free will kits why pay a lawyer to draft your will?

Fixing errors in Wills
Date: Mar 28, 2012

When Barry signed his will he failed to pick up the mistake. When Barry died “The Gin Palace” had already been sold and as a result Tina was left without an inheritance. When such an error is made there are several options open to a beneficiary in Tina’s position.

Executor’s duties and liabilities – Debts of the deceased
Date: Mar 26, 2012

Depending the size of an estate and the nature of the will, being appointed and executor can be an onerous task. For example if the estate is large and includes a variety of assets an executor may spend many hours arranging the sale of those assets to realise their value before distribution. If the will is contentious the executor may be named as a defendant in proceedings brought by beneficiaries or claimants under the will.

Matters the Court looks at relating to proof of validity of a will.
Date: Mar 01, 2012

The rule with wills is that a later valid will prevails over an earlier valid will. The party claiming that the later will should prevail has the onus of proving that the later will is valid.

Why should I get a lawyer to write my will, when a will kit is a fraction of the cost?
Date: Mar 01, 2012

To begin with if you have a complex asset structure an estate planner will be invaluable in making sure your assets are devolved efficiently and in manner that affects your wishes. But more importantly a lawyer is in the best position to ‘future proof’ your will. That is draft it in a way that reflects your wishes and prevents your will being challenged once you die.

When someone dies without a will - applications for letters of administration
Date: Jan 30, 2012

Lucy’s father died some years ago and her mother, Esther died late last year. Lucy has an older sister who lives overseas and a younger brother. After searching Esther’s house high and low and contacting Esther’s lawyers, Lucy was unable to find any will made by her mother. Esther had a house in Petersham, two bank accounts, a superannuation fund, a car and various personal effects. When Esther died she had a modest credit card debt as well as some outstanding utility bills.

Euthanasia, Murder and Inheritance: can those who bring about the death inherit from the estate of the deceased?
Date: Jan 20, 2012

As Australia’s population rapidly ages euthanasia is becoming an ever more pressing issue. Some people who advocate euthanasia are already at a stage in their illness where they require assistance to take the own lives. This puts any person assisting to bring about the death who is also a beneficiary of the estate in a difficult legal position. Not only do they risk criminal prosecution but it can affect their position as a beneficiary of the estate of the person wishing to die.

Can I bequeath my heart?
Date: Dec 13, 2011

When you can get a court ordered DNA test?
Date: Nov 28, 2011

Under s26 of the Status of Children Act 1996 a party to proceedings may apply to the Supreme Court for an order requiring a parentage testing procedure to be carried out for the purpose of obtaining information to assist in determining the parentage of the child.

Mum has left our family home to her new husband – what can we do?
Date: Nov 27, 2011

Before Jim and Genevieve married they decided to execute mutual wills. A mutual will is where each individual has a separate will but they confer reciprocal benefits on each other. Jim’s will stated that he would leave all of his estate to Genevieve and if she died the estate would be divided equally between their two children Julia and Jonty. Likewise Genevieve’s will left everything to Jim and to their two children if he died.

Is a will valid if a lawyer doesn’t sign it?
Date: Nov 21, 2011

In September Noreen handed Ngaire an envelope and said, “This is my will. You don’t need to read it now. Just hold on to it until I die.” Ngaire did not open the envelope but put it safely away in her top draw.

Who will look after your pets?
Date: Nov 15, 2011

For many, the processes of estate planning involves thinking about their family and loved ones - trying to take their circumstances into account and considering what measures they would like to take to promote their future happiness.

Challenging your parent’s will if they have left a larger portion of their estate to charity than to you.
Date: Nov 12, 2011

Some of the world’s super rich such as Bill Gates and Warren Buffet have famously left the bulk of their estate to charity and their children only a small fraction of their fortunes. Can you safely leave the majority of your estate to charity? Can you challenge your parent’s will if they have left a larger portion of their estate to charity than to you?

If the deceased has promised to look after someone; breach of promise/contract and family provision claims
Date: Sep 28, 2011

If someone promises to take care of you financially and then they die, what do you do?

Coercion in making a will
Date: Sep 07, 2011

The case of Wingrove v Wingrove (1885) is the authority for the proposition that a testamentary disposition does not have a testator’s knowledge and approval if the testator was coerced into making a bequest.

What can a will be written on?
Date: Sep 07, 2011

In Estate of Slavinskyj (1989), testamentary dispositions written on the back of a packet of cornflakes were held to be valid.

Witnessing a will
Date: Sep 07, 2011

A prominent Cricket fan wishes to make a will, but doesn’t trust anyone associated with the consortium for which he barracks to witness it for him.

COMMENCING FAMILY PROVISION ACT PROCEEDINGS
Date: Sep 06, 2011

If the deceased died after 1 March 2009, proceedings for a family provision orders are commenced pursuant to the Succession Act 2009. The Family Provision Act 1982 was replaced by the Succession Act 2009 on 1 March 2009. A claimant has 12 months from the date of death in which to commence proceedings for a family provision order.

DISTRIBUTING THE ESTATE: protection against Family Provision Act claims
Date: Sep 06, 2011

A claim for an order from a deceased person’s estate for a family provision can be made up to 12 months from the date of death.

What is a will?
Date: Jan 01, 2008

Can I write my own will?
Date: May 01, 2007

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