Testamentary Trusts are commonly utilised for their tax benefits and for controlling the distribution of funds to beneficiaries including minors and individuals who may be at risk or not capable of managing their financial affairs. However, Testamentary Trusts also offer an effective asset protection structure.
A Testamentary Trust is a necessity for anyone who intends to bequeath part or all of their estate to minors or those who may not be able to manage their financial affairs. These may include people with serious health conditions, disabilities or other special circumstances. Additional benefits include tax advantages when applying adult tax rates for minors.
Equally, Testamentary Trusts protect assets from creditors, delinquents and threats to the estate including former or estranged spouses. Put simply, those whom you do not want to take control of your assets or to make claims on your estate.
While there are significant advantages associated with Testamentary Trusts, unintentional improper management can expose the trustees to risk. For instance, if assets are held in trust for minors, any distributions to access tax rates will result in the minor having an enforceable debt against the trust, either now or in the future.
The trustee must be able to demonstrate that the assets held in trust have been managed prudently for the minor. Any costs incurred on behalf of the minor for their benefit should be recorded to ensure that no future liability exists. In some cases, it may be appropriate to establish a sub-trust to manage distribution liabilities.
Understanding the benefits of a Testamentary Trust is important, but equally you must avoid being singularly focussed on the tax benefits at the expense of fully appreciating the responsibilities that come with appropriately and diligently managing the trust itself. As your accountant, we can guide you on your options as well and provide clear instruction for avoiding any pitfalls.
To find out whether you need a Testamentary Trust in place, and for any other estate planning questions, please contact us.