Testamentary Trusts come in all shapes and sizes. From the very simple, to the super sophisticated.
Set out below are some of the more common options you may wish to consider for your Testamentary Trusts.
Who controls the trust?
The ‘Trustee’ is the person who runs the Trust after you have died. They are responsible for managing the assets, and making distributions of income and assets to beneficiaries.
A ‘beneficiary controlled Trust‘ is one that is controlled solely by the beneficiary, i.e. the beneficiary is the Trustee and has complete control over who gets the Trust’s income and capital, and when they get it. The beneficiary can also wind-up the Trust whenever they like.
At the other end of the spectrum is an ‘independently controlled Trust‘. Under this scenario the beneficiary is not a Trustee, and does not have any right to interfere with decisions about who gets the income and capital, and when. These decisions are made by one or more ‘independent’ people (who cannot themselves benefit under the Trust). The independent Trustees may be other family members, or professional advisers.
In between these two extremes are Trusts in which both the beneficiary and one or more other independent persons exercise joint control.
The key thing here is the balance between asset protection and control. The more control the beneficiary has over the Trust, the less asset protection the Trust provides. Conversely, to get the highest level of asset protection, the beneficiary would need to be excluded from control.
Choosing the right Release Conditions
If you involve an independent trustee in a Trust, you then need to think about when (if ever) the beneficiary will gain complete control – and be able to bring the Trust to an end. We refer to this as a ‘Release Condition’.
Some people only want to provide asset protection for a specific period of time, e.g. until the beneficiary reaches say 35 years old – at which time the beneficiary gains complete control of the Trust.
Others want to give the beneficiary control after a certain event, e.g. when they have entered into a property settlement with a former spouse.
Another option is to provide the beneficiary with control over say 50% of the Trust’s assets at say 30, and the remaining Trust’s assets when the beneficiary reaches say 40 (often referred to as a ‘second chance trust’, because the beneficiary can lose the first amount of money and then receive a second tranche).
When some or all of the Trust’s assets are restricted from being accessed by the beneficiary, they are referred to as ‘reserved capital‘. As noted above, the capital may be reserved until a particular time, but it may also be reserved for a second level of beneficiaries. For example, 30% of the Trust’s assets may be reserved for the children of the nominated beneficiary (e.g. your grandchildren).
Another condition that can be imposed within a Trust is the purposes for which the Trust income or capital may (or must) be applied. This may be combined with an allocation of an amount of Trust capital specifically for that purpose.
For example, you may specify that 30% of the Trust’s capital is to be retained in the Trust to fund the education of grandchildren, until the youngest grandchild reaches the age of 25. You can specify a maximum allocation per grandchild, and also specify what costs are to be covered. You can also leave these things to the discretion of the Trustees.
Other common ‘purposes’ include:
Providing housing for a particular person (e.g. a spouse during their lifetime, with the house then going to your children);
Ensuring healthcare for a group of family beneficiaries. For example, some capital may be preserved to meet the healthcare costs of children and grandchildren, either through paying for health insurance, or self-insuring; and
Aged care for a group of family beneficiaries. For example, a portion of the Trust’s capital or income may be allocated to fund aged care housing, or a supplement to the pension.
Income and capital
Finally is it worth noting that a Trust can have both ‘income’ and ‘capital’. Income is what the Trust earns each year. Capital is what you gift to the Trust through your Will. Capital can also include any income that is accumulated rather than distributed, and any additional gifts made to the Trust.
You can deal with income and capital separately. For example, you can give your spouse the benefit of the Trust’s income during their lifetime, and then leave the capital to your children. You can also deal with parts of the income.
What it means to be a ‘nominated beneficiary’
What we have been discussing above are the conditions on which the beneficiary will gain complete control over the Trust’s income and assets. It is important to note that this does not mean the beneficiary gets nothing until these conditions are satisfied. Rather, the Trustee must still administer the Trust for the benefit of the nominated beneficiary. The Trustee must still apply some or all of the income and assets of the Trust to maintain, educate and advance the life of the nominated beneficiary. It is just that the Trustee controls this process, rather than the beneficiary.
In summary, you can incorporate:
- Dates or events on which a beneficiary gains control over income and/or capital;
- Conditions on which a beneficiary gains control over income and/or capital;
- Specific purposes to which income and/or capital may/must be applied; and
- Specific limitations on what cannot be done with income and/or capital.
Call us on 1300 654 590 to discuss the appropriate terms for your Testamentary Trust.
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The information contained in this post was reviewed on 25 May 2022