Testamentary Trust

A testamentary trust (sometimes referred to as a will trust or trust under 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 be 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 people 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. Beneficiaries may have either a fixed or discretionary entitlement to income and assets from the trust.

The advantages of a discretionary 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.