testamentary trust

A testamentary trust (sometimes referred to as a will trust or trust under the will) is a trust which arises upon the death of the trustor, and which is specified in his or her will. The three parties involved in a testamentary trust are:

  • The trustor - Person who specifies that the trust is created and contributes property to the trust, usually as a part of his or her will.
  • The trustee – This is the person who administers the will as per the instructions in the will.
  • The beneficiary(s) – This is the person or persons who will benefit from the assets held by the trust.

Effectively on the date of death, certain of the deceased’s assets pass across to a testamentary trust where they are held on behalf of beneficiaries. The advantages of a testamentary trust include:

  • Minor beneficiaries (i.e. under 18 years of age) are not taxed at penalty tax rates on any income distributed to them from the trust. Instead, they are taxed at the adult marginal tax rates so benefit from the $18,200 tax-free threshold.
  • No CGT when assets pass to beneficiaries.
  • Income splitting and income streaming opportunities.
  • Protects assets from creditors and vulnerable beneficiaries.

  1. Determine whether a testamentary trust is beneficial.
  2. Have a solicitor incorporate a testamentary trust into the will of the trustor - Optimum structure to allow grandparents to transfer assets on their death to their grandchildren in a tax-effective manner (even if the children are under 18).

Should you use a testamentary trust will?