Demystifying Testamentary Trusts – Securing Your Generational Wealth and Property Portfolio (Part 1).

Demystifying Testamentary Trusts:

Introduction 

Navigating the preservation of your assets for the benefit of your children and immediate family is a common concern among property investors, general investors, and business owners. Despite its importance, many of us fail to act, often due to the pressing demands of time or a lack of accessible knowledge. Discussions about trusts and asset protection strategies are abundant, yet clear, comprehensive information on how these strategies function can be elusive.

This article answers following questions – 

1. “How can I ensure that only my children, and not my spouse’s new partner or their children, will inherit my estate?”

2. “How can I protect my estate’s assets in case the beneficiaries face personal lawsuits or bankruptcy?”

3. “I want to safeguard the assets I leave for my children against any impact from their potential divorces. How can this be achieved?”

4. “How can I ensure that only my children and family benefit from my hard-earned assets and property portfolio?'”

This article marks the beginning of a two-part series that delves into the complexities of Testamentary Trusts and how to effectively set them up for long-term asset protection and tax planning advantages. We will explore the remarkable tax benefits of Testamentary Trusts, offering insights that are simply too valuable to miss in the second part.

What Is a Testamentary Trust?

Testamentary trusts are discretionary trusts established through Wills, activated upon the death of the Will-maker. Upon the Will-maker’s death, all the assets, including properties of the deceased, are distributed to the trustee of the Testamentary Trust.

Imagine a special safe where your money and properties can be kept after you’re gone. This safe, known as a Testamentary Trust, is a smart way to ensure your assets are distributed carefully and wisely. It’s like a treasure chest that you leave behind, with a trusted family member (the trustee) holding the key. The trustee decides when to open the chest and share the treasure with the people you’ve chosen (the beneficiaries).

Using a testamentary trust means you’re thinking ahead. It’s like planting a tree that provides shade long after you’re gone.

Asset Protection: Remarriage or New Relationship of the Surviving Partner

If a Will doesn’t use Testamentary Trusts and leaves everything directly to the surviving spouse, those assets could be at risk if the spouse remarries or enters a new de facto relationship. Assets intended for the children of the original marriage may inadvertently benefit the new partner and their family. However, a Testamentary Trust can secure these assets, ensuring they are preserved for the designated heirs, such as the deceased’s children and grandchildren, regardless of any new relationships the surviving spouse may enter.

A Testamentary Trust serves as a strategic tool to preserve a deceased person’s assets specifically for their children, safeguarding the inheritance against the complexities of blended family dynamics. In the event the surviving spouse remarries and has more children, the trust prevents the dilution of the original children’s inheritance. It legally restricts access to the assets, ensuring that only the deceased’s children are the recipients of their legacy, irrespective of any new familial bonds formed by the surviving spouse.

Asset Protection: Marriage Break Down

The assets that are placed within a testamentary trust are, in a legal sense, the property of the trustee, not the beneficiaries. This arrangement can safeguard those assets in scenarios where the beneficiaries might face bankruptcy or legal judgments, providing a layer of financial protection. Assets held in such a testamentary trust follow the same principle as Discretionary Trusts.

Used right, the Testamentary Trust can be a powerful ally in your asset protection strategy.

The Case of Bernard & Bernard [2019]

The case of Bernard & Bernard [2019] serves as a pivotal example of the robustness of testamentary trusts in safeguarding assets during matrimonial disputes in Australia. When a financial feud erupted between a husband and wife, the husband was able to exclude a significant $3.5 million in assets from the matrimonial property pool, assets that were part of a testamentary trust established by his late father.

In this landmark case, the husband’s father meticulously crafted his Will to create two parallel testamentary trusts—one for his son and another for his daughter. Crucially, the son was designated as the primary beneficiary of his trust, but it was his sister who wielded exclusive control as trustee, and vice versa for her trust. The wife’s contention was straightforward: she proposed that the mirrored nature of the trusts essentially rendered the assets personal to each sibling. Had the Court concurred, the property pool subject to division in their divorce would have been substantially larger.

However, the Court disagreed with the wife and ultimately found that the trust assets were not matrimonial property because:

• The husband had no legal title to the assets of the trust as he had no control over the trust assets, nor any guaranteed entitlement to the trust capital or income; and
• The husband’s sister had complete discretion in determining trust distributions to the beneficiaries (the wife and the parties’ children were also beneficiaries).

While the trust assets were not matrimonial property, the Court found the testamentary trust was a financial resource of the husband.

This case perfectly illustrates how a testamentary trust can provide additional asset protection in the circumstances of a relationship breakdown.

Asset Protection: Shielding from Creditor Claims

Assets within a Testamentary Trust, managed by a trustee, can provide a layer of protection against claims by third parties toward the beneficiaries. Should a beneficiary face financial instability, assets inherited and under the trust’s care are less vulnerable to creditor assertions.

By allocating the estate’s assets under the care of a Testamentary Trust’s trustee, these assets are safeguarded from potential claims by third parties against a beneficiary. This protection arises because the trustee holds the assets for the beneficiaries’ benefit, not in the beneficiary’s personal capacity, which would normally expose the assets to claims.

Asset Protection: Asset Protection for Beneficiaries with Disabilities and Special Needs

A Testamentary Trust is really helpful for beneficiaries who may not be able to manage an inheritance on their own, like those with intellectual disabilities, illnesses, addiction issues, or other challenges. If a child or another beneficiary can’t handle their inheritance for a while, a Testamentary Trust allows the family to take care of the assets for them. This way, the family, not a government organization, gets to manage and protect the inheritance until the beneficiary is ready. 

Pro Tips for Establishing a Testamentary Trust

1. Understand the Purpose:
   • Research and comprehend the benefits of a testamentary trust, particularly how it can protect your assets and provide tax advantages.
   • Assess your family’s future requirements and the potential impact of relationship changes on your estate.

2. Generational Impact: 
   • Find out how the Testamentary Trust helps generations of your beneficiaries. 
   • If you or your siblings anticipate inheriting property from your parents or grandparents in the future, it is a worthwhile conversation to have with your family members to strategically structure the inheritance in the most effective way possible.
3. Asset Protection:
   • Choose a reliable and financially savvy trustee to manage the trust’s assets.
   • Like the ‘Bernard case’ mentioned in this article, consult with the legal team to have a different trustee for multiple Testamentary Trusts if you have multiple beneficiaries and properties to be included in the Testamentary Trust.

4. Consult a Professional:
   • Seek legal advice to navigate the complexities of setting up a Testamentary Trust tailored to your specific circumstances.
   • Consult with an experienced accountant regarding the Will and Testamentary Trust to understand the tax consequences.

5. Update Regularly:
   • Keep the trust deed and your will current to accommodate life changes and legislative updates.
   • Review your Will annually to determine if it requires amendment due to the purchase of new assets or the sale of existing assets.

Conclusion 

As we’ve explored in this first part of our series, Testamentary Trusts offer a strategic and effective way to manage and protect your generational wealth and assets, ensuring they are preserved and passed on according to your wishes. The use of such trusts, as demonstrated through scenarios and the pivotal case of Bernard & Bernard, reveals their robustness in safeguarding your estate against unforeseen circumstances in relationships and creditor claims. 

However, this is just the beginning of our journey into the realm of Testamentary Trusts. In our upcoming second instalment, we will dive deep into the tax benefits and potential disadvantages associated with these trusts, providing you with a comprehensive understanding of their impact. For those eager to explore further and seek personalised guidance, our team at Investax Accountant stands ready. With our experienced accountants and in-depth knowledge of Testamentary Trusts, we are here to assist you in navigating this complex yet crucial aspect of estate planning. Stay tuned for invaluable insights in the next part of our series, where we unravel the financial intricacies and challenges of Testamentary Trusts, helping you make informed decisions for your financial legacy.

Reference –

1. Bernard & Bernard – Family Law Resources

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