Do I Need a Will with a Testamentary Trust?

At DB & Co Legal, we often hear clients ask, “Do I really need a will with a testamentary trust?” The answer depends on your personal circumstances, financial situation, and goals for your estate. While a simple will may suffice for some, a will with a testamentary trust offers unique benefits that can provide greater control, protection, and tax advantages for your beneficiaries. To help you decide, let’s explore what a testamentary trust is, its advantages, and when it might be the right choice for you.

What Is a Testamentary Trust?

A testamentary trust is a trust established within your will that comes into effect after your death. Unlike a simple will, which distributes your assets directly to your beneficiaries, a testamentary trust allows your assets to be held and managed by a trustee for the benefit of your chosen beneficiaries. The trustee, whom you appoint in your will, has the discretion to distribute income and capital according to the terms you set out, offering flexibility and protection that a standard will cannot.

Simple Will vs. Testamentary Trust Will: Key Differences

A simple will is straightforward: it appoints an executor to distribute your assets directly to your beneficiaries upon your death. It’s an effective option for smaller estates or uncomplicated family situations where asset protection and tax planning aren’t major concerns. However, once the assets are distributed, your beneficiaries own them outright, leaving them vulnerable to risks like creditors, divorce settlements, or poor financial decisions.

In contrast, a testamentary trust will creates a structure where your estate’s assets are held in trust rather than transferred directly. This setup allows the trustee to manage and distribute the assets over time, offering ongoing benefits that a simple will doesn’t provide. While a testamentary trust is more complex and costly to prepare and administer, the advantages often outweigh these factors for those with specific needs.

Advantages of a Testamentary Trust

• Asset Protection

One of the standout benefits of a testamentary trust is its ability to shield your beneficiaries’ inheritance from external risks. For example, if a beneficiary faces bankruptcy, a relationship breakdown, or legal claims, assets held in a testamentary trust are generally protected from creditors or family law proceedings. This is because the assets remain in the trust and are not owned directly by the beneficiary. For families with beneficiaries in high-risk professions (like doctors or business owners) or those with unstable personal circumstances, this protection can be invaluable.

• Tax Efficiency

Testamentary trusts offer significant tax advantages, especially for larger estates. The trustee can distribute income, capital gains, and dividends to beneficiaries in a way that minimizes their tax liability. For instance, income can be allocated to minors or beneficiaries with little to no other income, taking advantage of lower tax rates or tax-free thresholds. This flexibility can save your family thousands of dollars over time compared to a direct distribution under a simple will.

• Control and Flexibility

With a testamentary trust, you can set guidelines for how and when your assets are distributed. This is particularly useful if you have young children, beneficiaries with special needs, or loved ones who may not be ready to manage a large inheritance responsibly. For example, you might stipulate that a beneficiary only receives their share at a certain age or that funds are drip-fed over time to support their education or living expenses.

• Protection for Vulnerable Beneficiaries

If you’re concerned about a beneficiary’s ability to manage money, due to addiction, disability, or spendthrift tendencies, a testamentary trust can safeguard their inheritance. The trustee can ensure funds are used for their benefit (e.g., for healthcare or maintenance) without giving them direct access to the capital, reducing the risk of it being squandered

When Might You Need a Testamentary Trust?

While a simple will works well for some, a testamentary trust may be worth considering if any of the following apply to you:

• You Have a Substantial Estate: If your assets (excluding superannuation) exceed $1 million, a testamentary trust can optimize tax outcomes and protect your wealth for future generations.

• Complex Family Dynamics: Blended families, remarriages, or beneficiaries with unique needs often benefit from the tailored control a trust provides.

• Risk of Claims Against Beneficiaries: If your beneficiaries are at risk of divorce, bankruptcy, or lawsuits, a trust may provide some protection to their inheritance.

• Long-Term Planning: If you want to ensure your estate supports your loved ones over time (such as funding education for grandchildren) a testamentary trust offers a structured solution.

• Vulnerable Beneficiaries: For those with disabilities or dependencies, a trust can preserve eligibility for government benefits while providing financial support.

Things to Consider

While testamentary trusts offer compelling benefits, they aren’t for everyone. They require more time and expense to set up than a simple will, and ongoing administration (like tax filings) adds to the cost after your passing. Additionally, the success of a trust depends on choosing a reliable trustee who can manage it effectively. At DB & Co Legal, we work closely with clients to weigh these factors and determine the best approach for their estate plan.