Ensure your family is financially protected for if you pass away

By Robert Lamb, Director & Caitlyn Wessels, Graduate Law Clerk at Hillhouse Legal Partners
| 3 min. read

Key takeaways

  • A Testamentary Trust (TT) is a type of trust established by a Testamentary Instrument, such as a Will, and are most commonly used in Wills by parents who want to ensure their children are not burdened with avoidable taxes and are in the best financial position possible. 
  • Under a TT, the assets in the Trust are protected from potential misuse by beneficiaries and any third party creditors, as the assets of the Trust are owned and controlled by the Trustee, not the beneficiaries or the estate.
  • Overall, a TT in a Will gives the trustee (and the Will maker) flexibility over how the assets are allocated to ensure the best financial preservation and protection of their family’s future.

Recent world events have left many people focused on their health and financial security including wondering how their family would be financially looked after should they pass away prematurely or unexpectedly.

Depending on your family’s financial structures, it can be relatively easy to put protections in place to ensure your family is well cared for financially and in the most tax efficient way.

One way to achieve this is by establishing a Testamentary Trust in your Will. 

What is a Testamentary Trust? 

A Testamentary Trust (TT) is a type of trust set up by a Testamentary Instrument, such as a Will. They are most commonly used in Wills by parents who want to ensure their children are not burdened with avoidable taxes and are in the best financial position possible.

The most common way to do this is to make the TT “discretionary”, so the Trustee (the person elected to care for and manage the Trust) can give money to the children (or other beneficiaries) as and when it is needed.

This allows for peace of mind, knowing that a Trustee is not restricted in how much they can give, should the need arise.

It’s more complicated than a standard Will, so why incorporate a Testamentary Trust in your Will?

Although adding a TT within your Will does make it slightly more complicated to administer than a standard Will, the benefits are in most circumstances worth it.

Under a TT, the assets in the Trust are protected from potential misuse by beneficiaries and any third party creditors, as the assets of the Trust are owned and controlled by the Trustee, not the beneficiaries or the estate. It avoids the worry of potentially leaving large sums of cash or assets to people or children that could be vulnerable.  

This is also how a TT provides for a tax effective management of your estate funds, as Trusts allow for funds to be allocated to individuals with lower personal tax rates. The tax benefits in many cases can be substantial sums of money.

See our infographic for a more detailed explanation of how this can work.

Other circumstances where a TT can be beneficial

TT’s should also be considered if:

  • A beneficiary cannot look after their own affairs e.g an infant child, an adult child with an intellectual disability or a drug dependency/gambling issue;
  • A beneficiary is facing bankruptcy or takes entrepreneurial risks or is in a high risk business where legal action is likely;
  • A beneficiary is facing separation or divorce or family court proceedings involving property;
  • The Will maker, whilst wishing to ensure their spouse is provided for, is concerned their spouse may misuse the funds and the children will not receive any financial support; or
  • The beneficiary(ies) may be subject to a challenge against their own Will or estate.

Overall, a TT in a Will gives the trustee (and the Will maker) flexibility over how the assets are allocated to ensure the best financial preservation and protection of their family’s future.

To make sure a TT and Will are set up correctly and to reduce the risk of any legal or financial complications after death, make sure you seek expert legal, accounting and financial advice before taking any action.

To discuss how Hillhouse Legal Partners can assist you in preparing your Will, contact Robert Lamb on 07 3220 1144 or [email protected].

The information in this blog is intended only to provide a general overview and has not been prepared with a view to any particular situation or set of circumstances. It is not intended to be comprehensive nor does it constitute legal advice. While we attempt to ensure the information is current and accurate we do not guarantee its currency and accuracy. You should seek legal or other professional advice before acting or relying on any of the information in this blog as it may not be appropriate for your individual circumstances.