Testamentary trusts and asset protection

Date: Sep 24, 2015

From drafting wills to lodging caveats, wills and estates law in NSW encompasses a number of complicated processes, many of which call for dedicated legal advice.

Testamentary trusts are one such process, with asset protection a necessary area to understand prior to speaking with an experienced lawyer.

What is a testamentary trust?

Trusts are arrangements that allow a person to hold either property or assets for the benefit of another. The person managing the asset is known as a trustee, and the people who are receiving the proceeds from these assets are known as beneficiaries. Trusts can be established by deed while a person is alive, or alternatively by will to go into effect after the person has passed away.

Those trusts established by will are known as testamentary trusts.

The testamentary trust process

The terms of a testamentary trust are outlined in the will, and there may be restrictions for beneficiaries as to their control over the assets, but depending on the terms of the trust, they could also have significant control over the investments and activities of the trust.

These types of trust have distinct advantages for those making the wills and the nominated beneficiaries. For example, some measure protection of assets against claims arising from financial or other difficulties might be provided by the trusts.

It is important that people are aware of asset protection when it comes to testamentary trusts, as well as the measures available to try to maximise the chances of assets remaining within their families, to be available to benefit family members.

This is particularly important for beneficiaries in higher risk positions. These positions include company directors or other high level professionals. These beneficiaries can be responsible for highly leveraged businesses.

Other considerations to be aware of

People may want to be concerned about financial instability among the beneficiaries of their estate, if there is a risk of bankruptcy for example. One way to increase protection of assets is to be careful about the appointment of trustees. Independent trustees can be important for testamentary trusts that have been established for vulnerable beneficiaries, particularly if there are other potential claimants on the assets who might have interest that compete with a vulnerable beneficiary.

Under testamentary trusts, the legal interest in the assets is owned by the trustee, and the benefit of the assets (income and capital of the trust) is available to the beneficiaries on the terms of the trust. Given the separated nature of the control and benefits, these trusts can protect assets from legal action that involves the beneficiaries.

In certain circumstances, the trusts can also protect assets from legal action involving their misuse.

If you need to discuss the testamentary trust process or the wills and estates process, speak to experienced lawyers in NSW.