Testamentary Trusts2017-08-17T06:51:50+00:00

Testamentary Trusts

At its most fundamental, a trust is a legal relationship between a trustee (who administers the trust) and a beneficiary (who gets the benefit of the Trust property (or income)).

Trusts can be a useful and tax-effective way to administer your assets, particularly when they are established in a Will. Testamentary Trusts (which are Trusts created by a person’s Will) have generous tax benefits for beneficiaries under the age of 18.  They can also protect the beneficiary from some types of claims against their assets.

We can help you assess your situation and decide whether a Testamentary Trust would be suited to you.  Some questions to consider are:

  • Do you want someone to manage property on behalf of the beneficiary to make sure it’s not wasted?
  • Do you want to make sure the transfer of assets and particularly the treatment of income is tax effective?

If you answered yes to either of those questions then a Testamentary Trust may be the best option.

No matter how simple or complex your needs, we can provide you with advice and guidance every step of the way.

Powers of Attorney

Powers of Attorney allow other people to make decisions and do certain things on your behalf while you are still alive.  This might be because  you are overseas, or because you no longer have the capacity to do it yourself.  This can cover making decisions about your medical care, dealing with your property and even day-to-day things like operating bank accounts and paying bills.

In Victoria you can also have a Supportive Power of Attorney.  This means someone can be appointed to help you do legal and administrative tasks, such as obtaining information and making decisions.  This is useful for people who have decision making power but need help to exercise that power.

It is important that any Power of Attorney you make works in the way that you want it to.  That means your Attorney needs to have all the powers you want them to have, and none of the powers you don’t.  It’s also important that the right person is selected and that there are appropriate backups in place.

We can talk with you about what your options are and what would be best for your situation

A trust is a legal relationship between a trustee who looks after or administers the trust, and a beneficiary; the person who benefits from the trust. The nature of a trust is a legal obligation on the trustee to look after the trust property, and invest it and use it wisely and carefully for the benefit of the beneficiary. The beneficiary has the right to receive benefits from the trust as required by the terms of the trust, and some rights to information about the trust and how the trustee is operating it.

The terms of the sort of trust being discussed here would usually be set out in a document such as a trust deed or a will.

A trust deed may be simple or complex depending on what is needed. It is a legal document which sets out:

1. who is to be a trustee;
2. the person or people who are to be the beneficiaries;
3. when and how the trustee is to provide benefits to the beneficiary;
4. what things the trustee is to take into account; and
5. what other powers and duties the trustee has.

The person who sets up a trust by a deed is usually called the settlor. For tax reasons, the settlor is often an unrelated party or a more distant family member who will not be a beneficiary and who has nothing else to do with the trust. If the trust is set up under a will, the settlor is known as the testator.

In trusts for the benefit of a person with a severe disability, that person may be called the principal beneficiary. Other beneficiaries, who are entitled to share what is left after the person with a severe disability has died or no longer needs help from the trust, are called the residuary beneficiaries.

A trust deed may also name an appointor, a person who is separate from the trustee and who can appoint new trustees or beneficiaries, or make changes to the terms of the trust, and who therefore often has significant control over the trust. The appointor will often be a parent or other close relative of the person with a severe disability, who has contributed property to the trust.

The property contributed to the trust is often called the capital and the trust earns income on that capital: rent on real estate, interest on money in the bank, dividends on shares, and so on.

A discretionary trust gives the trustee the power to decide to whom to pay a benefit out of a range of people, and how much to give to them, if anything. The trustee must consider all beneficiaries but is under no obligation to distribute to all beneficiaries.

A testamentary trust means any trust set up under a Will. However, people often use this term to refer more specifically to particular types of trusts under wills which may have tax planning advantages.

The person making a will is called the testator (this covers men and women although a woman making a will may be referred to as the testatrix). A will appoints an executor (sometimes said to be an executrix if a woman), or a number of executors, to administer the estate after the testator dies. If the will creates a trust, it will also appoint a trustee, who may be the same person as the executor, or may be different.

The property owned by the testator at the time of death is the testator’s estate. The people who share in the estate under the will are called the beneficiaries.

The essential relationship involved in a trust is the responsibility of the trustee to act in the interests of the beneficiary in accordance with the terms of the trust.

If the trust is discretionary, it is up to the trustee to decide whether to do anything, and if so, what to do, and it is not generally possible to compel the trustee to act in a particular way. You can control this to some extent through provisions in the trust deed or will.

In brief, the duties of the trustee are:

1. to implement the trust in accordance with its terms;
2. to consider whether to spend trust money or otherwise use the trust property for the benefit of the beneficiary, with reasonable frequency;
3. to invest trust property prudently and in accordance with the directions contained in the trust;
4. to avoid unnecessary expense or waste of trust property;
5. to take professional advice (legal, financial, accounting, medical or other advice) if required (at the expense of the trust); and
6. to keep accounts of assets and liabilities and income and expenditure and be ready to account to the beneficiary if required.

Trustees have the right:

1. to have their reasonable trust-related expenses paid from the trust;
2. to ask the Supreme Court to give advice and directions if they have a serious doubt as to what they are entitled to do—for example, if there is ambiguity in the way the trust deed is expressed, or if difficult choices arise which might result in a breach of trust, or if the trust seems to require something unusual or odd;
3. to recompense from the trust for the work they do, if the trust deed or will provides for pay for the trustee. It may be a very reasonable thing to provide for payment to trustees, because the trustees have a lot of responsibility and may have to spend a lot of time and effort deciding what to do in the best interests of beneficiaries; and
4. to appoint additional or replacement trustees to take over the role of trusteeship if the original trustees cannot continue.

Beneficiaries essentially have the right to have the trust administered in accordance with its terms and the right to call trustees to account.
The beneficiary can express his or her wishes and ask the trustee for assistance, but cannot compel a trustee to act in a particular way unless the trust deed or the will allows this.

Beneficiaries are entitled to require an accounting from the trustees, but are generally not entitled to an account of the trustees’ reasons for making a decision in one way or another. If the beneficiary believes that the trust has not been properly implemented, the beneficiary may apply to the Court for assistance (although this is always expensive and should be avoided wherever possible). A beneficiary with a disability may need help to do this such as a litigation guardian.

Otherwise, the beneficiary can expect to benefit from the assets in the trust, but the trustee may well have to balance short and long term considerations, especially in a trust which may last for many years. It may not be a wise thing to spend all of the money of the trust on something now, even though it seems a good thing to do, if this will leave the trustee without any resources in the future.

As a trust is treated as a separate legal structure for tax purposes, it has its own tax responsibilities. Trustees have an obligation to submit tax returns and pay tax as required. The trustee is entitled to pay tax from the trust assets. Sometimes it is the trust which will have to pay tax on income. Sometimes tax is payable by the beneficiary who receives income. These issues are complex, and you should seek professional advice.

Trusts are not entitled to the tax-free threshold available to individuals, and higher rates of tax (the maximum personal tax rate) may apply to income retained by trusts (that is, income not distributed to or used for a beneficiary). However, a trust created by a will which is a genuine testamentary trust is subject to the ordinary personal rates of tax.

If the trustee uses an accountant to prepare accounts and tax returns, there will be fees for that work. If the trustee is a company, there will also be legal and accounting fees associated with setting up and maintaining the company.
These sorts of expenses, and the legal and other fees of setting up trusts, are something you should consider with your professional advisers before deciding whether to set up a trust now, or through your will, or at all, what assets to place in trust, and when to do so.

Before establishing the trust, there should be sufficient capital to enable the trust to earn income to pay the costs of maintaining the trust as well as make distributions of a sufficient amount to benefit the beneficiaries.