Why include a testamentary trust in your estate planning?

Date: Oct 29, 2014

Undertaking estate planning can be a difficult process for individuals, especially when you consider the range of assets that people have these days.

One area that comes with planning the future of an estate is the possibility of establishing a testamentary trust to hold your assets in the future. A testamentary trust refers to a legal entity which is administered by one person (the trustee) on behalf of another (the beneficiary). Through this set-up, the management of the assets are separated from spending the proceeds of these investments.

The profits from the assets held within the trust are distributed to the beneficiary, minus any administration costs, but the beneficiary does not actually own these assets.

A testamentary trust can be established in two ways. It can be created either as a protective trust which the beneficiary must accept or as a discretionary trust, where the recipient has the option to accept or reject the conditions that come with this arrangement. 

Why set up a testamentary trust?

There are a number of reasons to consider preserving your assets in this manner as part of your estate planning.

For individuals like grandparents who want to leave aside additional funding for a child's education, a testamentary trust can ensure that these funds are kept secure and are subject to limited taxes. The same consideration might apply for children with disabilities who need ongoing financial support.

Another reason that individuals choose a testamentary trust is to ensure that their assets are not sold off by the beneficiaries or are not lost as a result of their work in a high-risk industry. Negligence claims or gambling problems can eat into a trust that is not kept separate from the beneficiary.

What else to consider

One of the main reasons that people set up a testamentary trust is to avoid paying excessive tax on their estate. However, there are other costs that need to be considered when setting up a trust. For example, the trust will need to be large enough to cover the costs of a trustee administering it. A small trust could end up costing more to administer than it is generating in revenue.

Existing family trusts and shared property can also impact the amount of assets that can be put into a testamentary trust.

For people thinking about their estate planning, it is a good idea to consult with a wills and estates lawyer. They will be able to advise on your specific situation and whether it is worth establishing a testamentary trust as part of your will.